businesses get two types of income. active income, and passive income. active income is if the have a factory in china and sell cars. they can delay paying u.s. taxes on that indefinitely. but the money comes from the rent, as so-called passive income, they have to pay taxes on that immediately. this provision says if your a bank -- you can be late paying your taxes. it is going to be considered active income. it is quite valuable to them. it is kind of a gray area. in 1986 when they did big tax reform, they said that is active income and we should tax that money.

host: we have been talking with sam goldfarb from cq roll call. thank you very much. >> explores the history and literary culture of all money -- of albany. tonight on c-span, a senate debate on the fiscal cliff. shaun donovan discusses it. harry reid and mitch mcconnell when back-and-forth on fiscal cliff issues and a proposal to raise the debt ceiling. here is part of their exchange. >> yesterday afternoon, i came to the floor and offered

president obama's proposal on the fiscal cliff to show that neither he nor democrats in congress are acting in good faith in these negotiations. with just a few weeks ago before a potentially entirely avoidable blow to the economy, the president proposed a plan the members of his own party will even vote for. he is not interested in a balanced agreement, not particularly interested in avoiding the fiscal cliff, and clearly not interested at all in cutting any spending. with the president is really in, as we learned just yesterday, is getting as much taxpayer money as he can, first by raising taxes on small businesses who he believes are making too much money, and then on everybody else. not so he can lower the debt or the deficit, but so he can spend to his heart's content.

for months, the president has been saying that all he wanted to raise taxes on the top 2% so he can tackle the debt and the deficit. however, yesterday, he finally revealed that that is not really is true intent. by demanding the power to raise the debt limit whenever he wants, by as much as he wants, he showed what he is really after is assuming unprecedented power to spend taxpayer dollars without any limit at all. this is not about getting a handle on deficits or debt or him. it is about spending even more than he already has. why else would you demand the power to raise the debt limit on his own? by the way, why on earth would we consider giving a president who has brought us four years of trillion dollar unchecked deficits of 30 to borrow? he is the last person who should have borrowing power.

the only way we will cut spending around here is by using the debate over the debt limit to do it. now the president wants to remove that to cut all together. of course, it gets away -- it's in the wake of his spending plans. i assure you that will not happen. the american people want washington to get spending under control and the debt limit is the best tool we have to make the president take that demand seriously. the american people want us to cut spending. it is a fight they deserve and a fight we are willing to have bee. i am prepared to ask consent to allow the senate to vote on the president's bill limit proposal. i would ask this either as an amendment to the russian pr member that we will vote on this afternoon or as a freestanding bill if that is preferred.

therefore, i now ask consent that it be in order to vote on an amendment which is the president's debt extension limit proposal. >> is there an objection? >> i have been thinking of how best to describe what has been having here in capitol hill for the last couple of weeks. every day, i get up and the first thing i read is the sports page. the sports page in "the washington post" is not as good as it used to be. there's always some good news and it is always on the sports page. due to the front page and get some of the bad news. but i -- but now i go to the

front page and get some of the bad news. a team that is really fun to watch is the new york jets. coach ryan has a problem. he has three quarterbacks, sanchez, tim tebow, and a guy by the name of mcelroy. he cannot decide who their quarterback is going to be. that is the same problem the republicans are having. romney is gone, but he still in the background. we have mcconnell and we have the honor. who is the quarterback, mr. president? -- we have mcconnell and we have boehner. who is the quarterback, mr. president? we just had an election. the people overwhelmingly know why we have this debt. the polling right before the election showed that the vast majority of the american people

realize that the debt was caused by george bush. that is a fact. mr. president, we have another judge report coming out tomorrow here we have a little problem because of what happened with hurricane sandy. but we will still have about 100,000 new jobs. we are approaching about 4 million jobs now that have been created. that does not merely make up for what was lost during the bush years, but we are making progress. people in america realize we cannot have a top-down economy that the republicans so glove during the bush years and they wanted to create begin with governor romney. mr. president, i would be happy to take -- and they want to have again beginning with governor romney.

mr. president, i would be happy to take a look at the proposal. if that is what they want to do, i would be happy to seriously take a look at that and report to the white house and my caucus. but until then, i object. -- r. president >> that has been heard. >> the majority leader says that the republicans do not know who the quarterback is which is common when you do not have the president. but on the democratic side, you know who the quarterback is and he is throwing interceptions. we're moving backward and backward and backward toward the goal line from $4 trillion annual deficits and my friend from nevada still wants to blame that on george bush? and now he is asking for an unlimited authority to borrow

whenever he wants to or whatever amount he wants to? >> majority leader. >> as a said, we would be happy to look at the proposal by my friend. but the president does not want to do anything other than what we have done before. and that is where we are now and that is why i would be happy to take a look at his proposal. that is what we did last summer. i would be happy to take a look at that and move forward on

this. we democrats have a long line of republicans, as i outlined earlier on, where people make sure that the middle class and the port are taking care of. we have the calmness from "the move on.times," let's >> hours later, senator reid returned to the floor. >> i now ask unanimous consent that at 1:30 p.m. today, the senate did proceed to read s664, regarding the debt limit increase, that there be no limits [indiscernible] upon user yielding back at that time, the bill will --

>> is there an objection? >> i reserve the right to object. what we're talking about is a perpetual debt ceiling grant in effect to the president. matters like this always require 60 votes. i would ask my friend, the majority leader, if he would modify his consent agreement to set the threshold at 60. >> majority leader? >> reserving a right to object. what we have here is republicans in the senate not taking is for an answer. this morning, the leader asked for consent on the proposal. now i am telling everyone to have that good, upper down vote. now he rejects his own idea. i guess we have a filibuster on the bill. so i object. >> is there an objection to the original request? >> yes, i reject.

-- i object. >> whiplash. >> madame president. >> what just transpired deserves a word. senator mcconnell came to the floor this morning and offered a change in law that would help us avoid the kind of obstruction and the kind of showdowns we have had in the past over the debt ceiling. in fact, the idea was not new. it was his original idea that has been the law of the land that followed. and he offered and challenged senator reid to bring this matter for consideration by the senate. he said he would bring this to a vote in 20 minutes. and we would decide up or down whether the debt ceiling problem would be resolved once and for all under senator mcconnell proposal.

and then senator mcconnell objected, say, no, no, we need 60 votes. for those who do not follow the senate, 60 votes is equivalent to a filibuster vote. so this may be a moment in senate history when a senator made a proposal, and when given a opportunity for a vote, he filibustered his own proposal. i think we have reached a new spot in the history of the senate we have never seen before. i will ask a parliamentarian to really look into this. i don't think this has ever happened before. but this calls into question if this was a kind of offer that would consider to be good faith. if senator reid offered to vote on it and senator mcconnell said no, that has to be a filibuster- proof revote >> i would ask my colleague to yield for a question. is it also correct that, basically, if we had voted, we would guarantee that we would not place the country again in a

situation of defaulting on our bills and send a message that we can work together? the fact that we were willing to accept the republican leader's proposal and be willing to send a message that, as a senate, we want to make sure we have fiscal stability, that we're paying our bills, that this could be one step forward in making sure we can resolve the fiscal issues for the country. view of this as well? in fact, it would be an important message about stability? i have to say i share your amazement that the leader would, in fact, object to his own proposal and now be filibustering his own proposal that we were willing to accept as a bipartisan good faith effort for the country.

did he not really just take us in the wrong direction? >> the republican senate leader, senator mcconnell, has such a strong appetite for the filibuster that we have seen 386 or 387 filibusters in the past six years. now he has decided that another good idea is to propose a bill and filibuster your own bill. i do believe that is history in the making. but that is why the epidemic for the filibuster in the senate has to change. what an abuse. we cannot have a vote on something that the republicans' proposed and the democrats were willing to vote for. this should make the news across america. it really is unfortunate. >> andy taylor covers congress for the associated press. what was he trying to do? >> i think he was trying to embarrass the democrats.

he said the president's plan on the debt ceiling would allow the president to request whenever increases without the approval of congress. i guess he wanted to embarrass the democrats if they wanted to vote for it in election years. >> had the democrats respond? >> there is a lot of politics going on here. we just talked about the politics for the mcconnell side. i think the democrats are aware that, even if they get the republicans to crumble on raising tax breaks for a cure -- for upper bracket people, there will be a need to increase the

debt limit in march. that is what speaker boehner uses as his leverage to a year and a half ago in his talks with president obama. i think there's a belief on the party democrats that they like to get this idea into come circulation. and they also want to manufacture some dialogue that the debt ceiling is not really the kind of leverage it was a year and a half ago. and you saw some of that from the president yesterday when -- or last week when he was talking about that he is not going to play that game may more. there is some of that. it turns out that the democrats would have enough votes to pass it through the senate. instead, senator mcconnell insisted that it requires 60 to get past the filibuster. >> on the republican side, how would a vote on either the

fiscal cliff or raising the debt ceiling help the gop make their case? i am not entirely sure that it would. i am not sure hal and effective issue it would be pure >> the houses out now -- it would be. >> the house is out now. >> there is no public indication. you talk with some senators who yesterday were saying that not a lot is going on, more privately them publicly. but since then, we know that president obama and steve [indiscernible] spoke yesterday evening. the fact that neither side is leaking what happened on that call, you might say that they are trying to get back on track. they know that if they leak each

other's confrontations, that is not good. there are only two participating really in this negotiation. and if they choose not to leak out that information widely, it is a speculation. >> what is the handle and how quickly could be brought -- what is the end goal and how quickly could be brought up for a vote? >> the goal is a down payment or some kind of thing for revenues, which is enough to get us past the fiscal cliff, turn off these automatic spending cuts and make sure that taxes don't go up. and then they would figure out what to do with the upper bracket. and then there would be a

mechanism that would guarantee further action next year. if at all possible, they would disagree next year and there would be some sort of trigger or punishment for their lack of action. that sounds relatively simple, i think, putting it all together could take at least a couple of weeks after they have a deal. there could be some inevitable blocks either by conservatives in the house or in the senate. blowups either byow wha conservatives in the house or in the senate. the details can get pretty political party quickly. there's so much in flux.

it all presupposes that the get an agreement. there was a school of thought that they could not get an agreement until tax rates actually go up next year. >> you can follow himat @apandrewtaylor. >> a discussion on the u.s. economy and you pull in the middle class with participants from think tanks, academia and business at 8:30 a.m. eastern tomorrow on c-span 2. >> the supreme court will look at what was passed in 2008 by a majority of six-three, i believe, and they will say that is president. and coming indiana had voter -- and indiana had voter i.d.. >> it was constitutional for

them to establish id in the indian case. they did not say that all of those states -- >> let me finish. you misrepresented what i said. >> no, you let me finish. >> it is the law of this land your >> when i hear these accusations that black people, though her i'd be lost disproportionately affect minorities -- that voter i.d. disproportionate effect minorities, what are you telling black people? the somehow they are not good enough? their lesser then? that is what bothers me about a lot of the rhetoric coming from democrats and the left. that we always have to make special -- you know, there has to be a specialist when we deal with minorities because they are

too feeble minded. we really need to make concessions for them because they cannot follow the rules like everybody else. and when you treat people like victims, i don't think they want to inspire pierre >> the editor and -- to is -- to aspire. >> the editor and founder of blackchick.com. >> senator bob casey cheers this joint economic committee hearing. it is one hour and 45 minutes.

>> the committee will come to order. we want to thank everyone for being here today. i did not have a chance to personally greet our witnesses, but i will have time to do that later. i want to thank both of our witnesses for being here. i will have an opening statement that i will make, and then i will turn it to dr. burgess. i know that vice chairman brady will be her as well. we know the challenges that we confront here in congress on a whole range of issues, which are sometimes broadly described under the umbrella of the terminology, fiscal cliff. when we confront those difficult challenges, we have to ask ourselves a couple of basic questions. one of the basic questions we must ask is, what will be the result and will be the impact as it relates to middle income families? what will happen to them in the midst of all these tough issues we have to work out?

we know there is broad agreement that going over the so-called fiscal cliff would jeopardize the economic recovery. it would do that by increasing taxes on families, halting employment growth, driving unemployment up instead of down, triggering a deep cuts to programs that families across the country count on. the job before the united states congress is to reach an agreement that builds on the economic progress that we are making, and puts us on a path to fiscal stability. we need to cut more spending, and generate more revenue. we need to do it in a smart way that keeps our economy growing. earlier this year, congress extended the payroll tax cut through 2012. the two percentage point payroll tax cut has played an important role to sustain the recovery. boosting economic growth by an estimated 0.5% of one percentage point, and creating 400,000 jobs.

we should continue the payroll tax cut through 2013, and yesterday i introduce legislation that would keep the employee payroll tax at 4.2% next year. to keep the economy growing -- there is good evidence of that in the last couple of months? job growth of about 511,000. to keep that momentum going, we should provide tax credits to small businesses. that add jobs or increase wages from year to the next. my legislation includes such an incentive for small businesses to grow. i am confident that congress will again be successful in reaching a compromise in the days ahead. i look forward to hearing today from the experts that we have before us today on how to

reduce the deficit while protecting middle income families. as we enter the holiday season, americans should not have to face the uncertainty that many will face with regard to their taxes. there is no reason that middle income families should go into this holiday season without knowing whether their taxes will go up next year. last year, democrats and republicans work together to cut nearly $1 trillion of spending. now we need to continue that bi-partisan work to cut more spending, and to bring in additional revenues. if congress fails to reach an agreement under the budget control act of 2011, $1.2 trillion in automatic spending cuts will take place between 2013 and 2021. republicans and democrats agree that indiscriminate across-the- board cuts is not the right and to do at this time in our nation's history.

if we trigger the automatic spending cuts and tax increases, gross margin bottom will fall by half a percentage point. we will reverse the hard-fought gains over the past few years. we cannot afford to go backwards. instead we need a balanced and bipartisan approach. one that balances the short and long-term needs, distinguishes between foreign investments and the core investments that must be reserved, and spending that we can live without that utilizes both spending cuts and revenue increase. the first order of business should be to protect those middle income families i talked about and protecting them from a tax increase. the cbo estimates that simply extending the middle-class tax cuts would boost gdp by 1.3% and create 1.6 million jobs.

let me say that again -- boosted gdp by 1.3% and create 1.6 million jobs from that tax cut we can enact. it would resolve much of economic safety for these middle-class families. the wealthiest among us can help us reduce the debt by paying more. it is encouraging to see republican members of the house and the senate speak out on the need or a deficit approach that includes raising taxes on wealthy individuals and to moving right away to ensure that 98% of families do not face a tax increase. we need to look at history. what we saw in the 1990s and 2000s, there was no relationship between lower marginal tax rates for the wealthiest among us an economic growth.

first during the clinton administration, the top marginal tax rate was raised on the wealthiest individuals and the economy grew at its fastest rate in a generation. it added more than 22 million jobs. during the following eight years, the top marginal rate dax tax rate was lower, but economy never regained its strength from the reviews decade. job growth slowed and wages stagnated. middle-class families are vulnerable when the recession began at the end of 2007. i hope this hearing is helpful not just in this hearing, but across this country to people who are watching and waiting for congress to act. i will say more at the end about some of our members who are leaving. it has been an honor for me to

serve as chairman of this committee and also served with my friend, kevin brady, as vice chair. he has been great to work with. i hope there'll be bipartisan success in congress. i look forward to working with him as i change seats in the senate for the next congress. -- in a sense for the next congress. i am grateful to our witnesses, whom i will introduce. before i do that, opening statements. >> i think the chairman for the recognition. this is the concluding hearing from the 112th congress. i'm behalf of the vice chair, kevin brady, on behalf of republican members and myself, we wish to thank you or your services on the committee. this unique committee with equally divided. people are used to seeing such

division producing gridlock in washington, but senator casey and senator brady worked together and had bipartisan cooperation. joint economic committee has riced as a widely respected forum on debating issues. i think you, senator casey, for your leadership. -- i thank you, senator casey, for your leadership. i also want to recognize the retiring senator from this committee, the senator from new mexico and the senator from virginia. our first secretary of the treasury, alexander hamilton, observe energy is a leading character in good government.

the president must lead in a divided government and must not advocate his or her -- not abdicate hor or her responsibility. president obama has the responsibility to propose a real bipartisan plan to avert the fiscal cliff that can pass both the house and the senate. withdrawing from the recommendations of the simpson- from thewing recommendations of the simpson- bowles commission, the president could propose a plan that would not only avert the so-called fiscal cliff, but also help us avert the fiscal abyss. if president obama were to offer such a plan, republicans would act favorably. going over the cliff is unnecessary. as it has been observed in "the wall street journal," the president is boxing in the republicans. he is offering them a deal they cannot accept.

first, the president has repeatedly called for a balanced solution involving both revenue and less spending. what is obvious to the most casual observer is that this plan is not a balanced. the fiscal cliff involves nearly four dollars of anticipated revenue from higher taxes for every dollar of spending cuts, yet the president wants more revenue and fewer spending cuts. if we fell off the cliff, his plan calls for another round of stimulus spending. you have got to be kidding me. lackshe president's plan is any reform in our entitlement system. the unrestrained growth in entitlement system is driving deficits and driving the debt even higher than the percentage of our gdp. it is estimated to be as high as $128 trillion.

even if they confiscate all of the income that excesses $1 million, we cannot pay for the entitlement commitments that the federal government has made. we have made promises to ourselves that we simply cannot keep. without some sensible entitlement reform, our credit rating will be downgraded again. we will become a country that none of us recognize. secondly, fiscal plans failed to achieve their government budget deficit or debt reduction goals. dr. hassett has examined fiscal plans in other countries. on average, unsuccessful plans proposed an increase in revenue and spending cuts. moreover, the higher revenues in successful plans were generally drawn from non-tax sources and avid sales and

adjusted fees for -- such as asset sales and adjusted fees for government services. thirdly, the government argues that the 2001 tax cuts are extended, raising tax rates on the top 2% will not harm the economy because it will not affect consumption expenditures. however, analysts have analyzed the combination of expectation -- of the expiration of the 2001 tax reduction for the top 2% and the extension of the medicare act and capital income. under the president's preferred tax policy, the top rate would go from 35% to 49.9% and for ordinary income from 15% to 25%. the long-term consequences of president obama's tax policies would have a profound and

negative affect. capital stock would fall. fewer jobs and lower wages resulting in higher taxes would harm the middle class. data reveals three important facts of high income earners. the taxes on the wealthy raise as much faster than on everyone else during economic booms, but they also fall much faster during economic bust. people report more income when tax rates are low and not when they are high. there are better ways to increase federal revenues than hiking tax rates.

congress could enact a program of tax reform that would lower rates and eliminate interest reductions. the president could open up more federal lands and offshore areas for energy exploration. his administration could take a more balanced approach to new regulations. economic growth can help solve our fiscal problems if the economy had grown at the percentage as it has done in the past. the treasury could have collected an additional 650 billion dollars in fiscal year 2012. the deficit that would have fallen. still bad, but remarkably better than where we find ourselves today. republicans stand ready to work

with president obama for a balanced and bipartisan solution. so far, no evidence of that. let's create a long-term solution that does not burden individuals and gives businesses optimism to go forward and invest in the american economy. then the economy can grow for all citizens. i look forward to the testimony of our witnesses. >> thank you. i will introduce our two witnesses. dr. zandi is the chief economist at moody's analytics. he looks at macro racquets and -- macro economics and public policy. he is the influential source of policymakers and businesses and journalists. recently he published a report assessing the challenges of approaching the fiscal cliff and the most effective way to achieve long-term, fiscal

stability. he received his phd from the university of pennsylvania. that will be a recurring theme in these introductions. [laughter] dr. zandi, thank you for being here. dr. hassett is the director and senior fellow at the american enterprise institute. he holds a phd from the university of pennsylvania. his research includes the u.s. economy, tax policy, and the stock market. he is previously a senior economist at the board of governors at the federal reserve system. he went to that graduate school of business at columbia university. he has worked for both the george w. bush and clinton administrations. both of you went to the same university. i'm sure you can agree on everything today. dr. zandi first.

>> thank you for the opportunity. it is an honor to be here with kevin, a good friend of mine. let me say that these are my own personal views. they don't represent the views of the moody's corporation. lawmakers have to resolve three issues -- first, the fiscal cliff. second, raising the treasury debt ceiling, which as you know is becoming an issue rarely soon. -- an issue fairly soon. third, achieving long-term fiscal sustainability. that is deficit reduction and tax increases and spending cuts that allow the gdp ratio to stabilize by the end of the decade. these three things need to be done now. in terms of the fiscal cliff, if policy is unchanged and we

go over the cliff and there is still no change after that, the gdp in 2013 will 3.5 percentage points. subtract that and that is a severe recession. cbo and others are probably us are underestimating how severe that will be because confidence is very weak. it is unclear how the reserve would response to this. we need to scale back from the cliff. at the very minimum, the cliff needs to be scaled back so it is only a hit to gdp at 1.5 percentage points at most. if you have more of a drive than that, it it becomes it.

-- if you have more vague d rag than that, it becomes unsustainable. the economy will weaken. the budget deduction will deteriorate. we are seeing a fiscal drag in europe. i would argue that we should smooth into this drag even more. make policy changes so next year the gdp is half of this speed limit. that would be consistent with extending an emergency program and some form of tax holiday. in terms of the debt ceiling, that needs to be increased. it would be nice to extend it at the next presidential election. it would be nicer to get rid of it altogether. it is anachronistic law that is a problem. it creates a great deal of uncertainty. as you can see, it can do a lot of damage to the economy. there are a lot of reasons why it is being considered to eliminate

jig there are a lot of reasonable proposals being considered to eliminate that ceiling. it should be carefully considered. at the very minimum, we should push this to the other side of the election. we do not want to address the debt ceiling on a regular basis. it is damaging confidence. on fiscal sustainability, we need deficit reduction in the next 10 years of about $3 trillion. to get there, a balanced approach would be $1.4 trillion in tax revenue. half of that would come through tax reform and the other half through higher tax rates. $1.2 trillion in cuts to programs -- medicare and medicaid, social security, and other budget items -- that would leave you with approximately $400 billion in interest savings. at all of that together and you

get $3 trillion. the spending cuts were implemented as part of the budget control act. if you add all of it up, if you go down the path i articulated, the spending cuts would be -- the revenue increases would be 2-1. i think it is very consistent in the spirit of simpson-bowles. it would be a good goal to achieve. it is doable from both an economic and a political perspective. finally, you need to nail this down. uncertainty is killing us. it is hurting business investments. it has not affected laying off decisions yet, but it will. if we do not nail this down, investors will bail and the economy will struggle.

but if you address this problem reasonably -- we have made a lot of progress since the great recession. if we nail this down, we will be off and running. thank you. >> dr. zandi, thank you. dr. hassett. >> thank you. it is always a pleasure to appear before this committee. under your leadership, this has always been a collegial lace to testify. it is an honor to be here. my testimony is broken up into two parts. in the first part i described the short-term consequences of going off the fiscal cliff. in that section, i concur with

dr. zandi that if we were to go off the fiscal cliff with no policy changes, then the near- term negative economic consequences would be significant. it would throw us into a recession. in the second part of my testimony, i will discuss the trade-offs we face between putting off the tough problems for tomorrow because we are worried about near-term effects. i think the evidence of the long-term effects of government debt to gdp ratio is quite overwhelming. it began with an early analysis who analyze economic growth that high debt levels. it has been confirmed that high levels of government debt shows low economic growth. these literatures can get more sophisticated.

there is a paper that identifies a tipping point in gross debt to gdp ratio. if it gets above 73% and we are above that now, that has a very significant and negative affect on economic growth. to put the result in perspective, there is a simple tabulation that provides intuition for the result. if you run a deficit of 6% in gdp for the next 10 years, that would add to the gdp ratio. that increase would be a not by the end of the decade that would reduce the forecast. these effects are very significant. that growth story might be alarming, but the picture looks worse if you think of financial calamity.

much of europe this year has been in turmoil because of the greek crisis. that in reality, the sickest european nations are in better shape than us. look at the struggles and other countries and take consolation in our relative stability. a recent study examined long- term projections for other countries debt burden. it found that the u.s. has a bigger adjustment than any of the european unions. it gives an urgency for us to act. it is also possible to theorize about how a continuation of these policies could hurt growth farther into the future. a recent paper shows that if we do not act on this, and we are basically producing a fundamentally different america.

it suggests that we are going to move into a world by 2040 were economic growth in the u.s. is not what we normally expect to see each year. there is crowding out of unity by the government. that is how urgent it is. what should we do? there is another large literature that looks at fiscal consolidations. using my own study as an example and along with my two colleagues, our metric of success is that they achieve deficit reduction. we found fiscal consolidations that were very heavily weighted for spending were much more likely to be except the both

then consolidations that were -- likely to be more successful than consolidations that were heavily weighted toward tax increases. we speculate that this is because we find this result because the tax heavy fiscal consolidations do not make tough choices on entitlements and because spending is more real when you lift the tax rates. it is easy to discuss reforms that could but u.s. and a positive trajectory. dr. zandi and i agree on the rough outline of what that would look like. the political challenge is a heavy one. if you look forward to the america we are creating, that we all have to agree that the stakes could not be higher. thank you, mr. chairman. >> thank you, dr. hassett. i would like to start with a comment about something we are probably not talking enough about. even as we are wrestling with trying to debt a handle on the

fiscal cliff, we cannot lose sight of their urgent priority of making sure we have job growth -- job creation, to say the least. many of the components you have outlined -- that both of you have -- it comprised of the broad description of the fiscal cliff whether it is the expiring tax cut provisions, the expiring tax cut extensions, and spending cuts as well. if you consider more, which of those would you consider having the biggest bang for the buck in terms of economic impact of those that we are discussing here today? >> it is a given that we will

extend the current tax rates for taxpayers that make less than $250,000 on an annual basis. that is absolutely necessary. when you consider the other things that are happening -- in terms of the bang for the buck, the emergency unemployment insurance program is very effective. it is small in the grand scheme of things. cbo is estimating it would costs per calendar year about $33 million. but the economic opportunity for job growth compared to the unemployment rate would be measurably more than that. we are down to go to million

people in the program. it is falling each year. i expected to fall even more than that in the next year. there are also limits to how much emergency you can collect. there has been some good work that has come out of the reserve. it is a very significant positive. i think the payroll tax holiday has been very affective. it has very high bang for your buck. it gets spent. of hitting.skind it gets spent -- it is kind of

hidden. it gets spent. it is designed in a way that helps lower income households. you might want to consider scaling that back. you can go to go 1%. remember making work pay? that was a good middle ground. it costs about half of the current payroll tax holiday. it is probably more affect it in the sense that it is designed to help more middle and low income households. that is a very effective program. >> dr. hassett, any comments on this question? >> thank you for asking that question. i disagree with my distinguished friend on this topic. keynes himself talked about the kind of place where we are right now. if you get onto a cycle of dependence on measures, it could lead to a downward spiral as the national get -- that gets bigger because you try to stimulate things with shots --

one-time shots. i speculate that you might incur that the best possible thing we -- i speculate that he might conquer the the best possible thing we -- i speculate that he might concur that the best possible thing we can do right now for unemployed americans is fix our big problems. it would help if american businesses had clarity on what the future would look like. the sight of relief rally from such a thing would be worth better than anything you could get. >> i appreciated. i'm out of time, but i will come back to these issues in a moment. >> dr. hassett, an interesting opposition since you cannot ask questions. let me pose a question to you -- if the best thing that can be done is a long-term fix for

our problems -- get out of this cycle that we are in -- would you agree with dr. hassett on that? >> i agree that we do not want to get into a cycle of dependency. we need to phase out the support -- the temporary support we have been running through the economy. in fact, that is what we have been doing. go back to 2009. by 2011, the fiscal policy was -- if you go back to 2009, adding two 0.5% pointed to gdp. by 2011, federal fiscal policy was neutral in respect to the economy. this year it will subtract from growth 8/10 of 1%. we have gone from fiscal stimulus to fiscal drag.

all i am arguing for fiscal year 2013, we need to smooth into the fiscal drag. the government will be -- debating how much of a headwind it will be. we need to smooth into that drag. in the long run, we will be better off for it. >> is that a committee rule? >> it's not a rule. we will just keep it to a minimum. >> let me ask you for your response to his comment on the cycle of dependency. >> i think it is quite possible that is where we are. >> can i interject here? it feels that way to me. it feels like we are in a cycle of dependency. we are dealing with the 2011 debt limit and the stimulus from 2009. it is the same thing with

different labels. i am having difficulty seeing a way out of this cycle, but i interested in your observations. >> the way that i think about this -- at moody's they have been careful to put in this perspective into their analysis. think about the way of what happens when you change the way you are playing the game. if you decide to spend a lot this year or mail checks to folks this year, that has a multiplier effect. you might get 2% gdp growth this year. but if you take that away, you are starting out with gdp growth 2% lower. there is a third phase where you need to pay for it.

it is in the negative. in the end, you will have to pay something. you see that in the long run cbo analysis of these policies. we are in the hangover phase. i can say that there is a way out and it is very promising. we need to recognize that we are out of the emergency period. if we can fix the problems, we can get out of the hangover. >> the president is proposing the 47% spending cuts and 57% spending increase. why in the world would be even

consider the president posted plan under the scenario that you described? >> the argument against our paper being a guide is that there are many small countries that may be have to be more aggressive about spending because people who lend them the money might head for the exit quicker. if you want to base our consolidation on the things that have succeeded in the past, we would be at a certain percentage of spending. there is great comfort that it would be successful. there is argument that we might be able to handle having bigger revenue share of that. if we copy the successful ones, we should surely almost succeed. if we have a half-and-half approach -- look at our paper when it came out almost two years ago.

we said that the uk consolidation would fail. it had too much revenue. as we are seeing now, millionaires and billionaires are heading for the exit. that is what we are going to see. >> thank you. mr. chairman, i yield back. >> i would like to congratulate the chairman on his election and the fine work he has done as chairman of this committee and to congratulate mr. brady on being selected as his chair of this committee and the next congress. for our distinguished witnesses, they agreed that what we need to do is have a long- term solution. i would like to ask dr. zandi how we achieve that. we are several million dollars apart from the president's proposal. how would you close that gap? outline the president's proposal and speaker boehner's

proposal. how can we get people employed and move our economy forward? >> i apologize. there will be a fair amount of numbers here. the president's tax revenue proposal amounts to about $1.6 trillion over a 10-year period. that is from higher tax rates. roughly 600 billion are from some kind of tax reform. they are all reasonably good proposals. speaker boehner's proposal on revenue -- is roughly $800 billion in tax reform.

we are about $800 billion apart on taxes. my view is that we should roughly split the difference. i would suggest $1.4 trillion in tax revenue. $700 billion would come through tax reform. we can discuss what that might look like. $700 billion would come from higher tax rates. the president would scale back one trillion dollars. we can talk about that. on the spending side -- does 600,000 -- speaker boehner has come forward with some proposals.

i'm not quite clear on how much the spending cuts he has proposed. the president's proposal is short. to get to where we need to go, that $3 trillion target and fiscal stability, we need $1.2 trillion in spending cuts. that should be part of the process. we should do some things to reform social security. after the end of the day, it needs to be almost double of what he is proposing. if you sit down and do the

arithmetic of spending cuts and look at medicare and medicaid, unless you're proposing a big and structural change in the program, which i do not think is on the table at the moment, it is difficult to get that cut. it is really tough. if you do a run rate of about $600 billion in cuts, that is ok. bottom line -- fiscal sustainability at the end of this 10-year horizon. if we do that, we are off and running here. >> my time is about to expire. dr. hassett, i would like to hear your analysis on how far apart we are and how we can close that gap. >> thank you. we have a tremendous opportunity to make sure that we

hand off a thriving economy to our kids. i mentioned that it we were to run $600 billion deficit for the next 10 years, by the end of that, the debt -- it would lower our gdp forecasts. if we were to cut with the fiscal consolidations that $600 billion deficit to $300 billion, we would be buying future generations gdp growth in the long run. it is ultimately a question of what kind of world we want to live in 10 years from now. if you want to look like the way europe has been growing, we will have a small consolidation, such as the small consolidation

proposed by the president. if you want to have the kind of growth that i hope we can have with a bigger consolidation, that one is being proposed by speaker boehner. >> thank you. >> i would like to focus on something that is probably more of interest to the economists and ordinary people. let's talk about ratios. what i heard you lay out, dr. zandi, was more of an ideal situation. they get you at roughly at $3 trillion. the negotiations over last year's debt ceiling -- the new number would really be 1-1.

that is not actually my question. i want to get to now. we have looked at the president's offer. we haven't found any spending reductions at all. we found the $1.6 trillion tax increases. we saw the extension of the unemployment insurance, which is an increase in spending. the delay in the spending cuts and no reform in entitlement whatsoever. do you think the president's

current offer gives us the 2-1 test? >> no. he needs to come up with roughly $600 billion more in spending cuts over the next 10 years. i think that there are significant reforms in medicare, medicaid, agricultural subsidies, and other programs in the budget. those are difficult things to implement. it takes a lot of guts to propose those things. i would not discount them. they are important. to answer your question more specifically, we do name or spending cuts to get to my ideal. >> policymakers need to reform entitlements. i do see members of the other

party -- most notably, mr. hoyer --he said, not now. they are on the table for a later discussion. i have been disappointed that a lot of the discussion seems to be on the revenue side and not really on the cutting side. really quickly, the debt ceiling. there is something about your testimony that caught my attention, which is your support for the initiative offered by senator rob portman. lawmakers can adopt a version of the so-called dollar rule to address the 2011 debt ceiling. policymakers could agree at the beginning to cover that here -- year's budget.

they could -- adopting some form of this rule would be a good safeguard. i appreciate his comments. isn't this exactly what we did that now everyone is trying to get out of? we have a dollar of spending reductions. 1.2 is already in place. the other is in the sequester. isn't that what we did? if that isn't a good idea, why are you and the others now suggesting it is not a good idea? >> let me say a few things. first, the broad context. we need to get rid of the debt ceiling law. it is agonistic. we need to get rid of it.

i suggest that some version of the dollar for dollar rule should be incremented. at least considered. it does not need to be one-for- one. it could be 50%. that is not going forward. my view is that we need to nail down how we can get to fiscal sustainability. get rid of the debt ceiling law. we need some form of budget rule to make sure that some discipline going toward. >> structure. >> yes, structure.

we need to show people that we will stick to this plan. >> thank you. >> thank you very much for being here. i appreciate your testimony. dr. hassett, dr. zandi has indicated that he inks the debt limit crisis we had in august 2011 was bad for the economy and the country and that we should avoid it for the future. do you agree with that? >> first, yes. i think the best testament of this has been done by co- authors who have a very cool index of economic uncertainty. it is a very innovative paper. they estimated that the debt

limit struggle probably subtracted about 1.5% from gdp growth during that summer when it was happening egos of the uncertainty and inactivity that was caused by levels of uncertainty. each time we go through that, there are consequences. i would like to add if that is what it takes to get spending under control, we need to concede that in the long run there will be a benefit, which means we do not have these deficits. in the fullness of time, whether a struggle last summer was worth it, if we have the spending cuts and deficits are lower, it might have higher economic growth in the long run because we went to that struggle last year. >> your position is that we should be ready to go through that struggle again and to call upon the national debt is necessary in order to enforce

spending limits? >> that, of course, is not my position. we should never default on the national debt. the politics of debt reduction, which you on the better than me, are very difficult. i am not a political expert. if there is something we need to do that helps deficit reduction occur, i am not willing to stop process. >> you are saying defaulting of the national debt might be something we need to do now and then? >> no, sir. we do not default last summer. >> we did not. but we might in january of february. is it your position that we should be willing to default on the debt if that is necessary in order to force spending cuts? >> i would not be willing to default on the debt under any circumstances. look at the history of what has

been done. there is a long history of using that debt limit as a moment to distract from the party in power. if we had an academic seminar on the impact of the that struggle and the fiscal policy, he would say that it was a negative thing. >> well, i have never until last year of august 2011, i have not seen any serious effort or serious threat made by the leadership of congress to refuse to give the secretary of treasury the ability to offer to meet obligations congress had adopted. i thought that was a new

experience for us. it certainly was for me to see that happen. dr. zandi, you said you think that we need to repeal this law that tries to set a debt limit and concentrate more on taxing and spending policies that causes to raise the debt, as i understand? >> absolutely. it is a bad way to conduct policy. it is a problem. look at july and august of 2011. it was a mess. gdp downgraded the debt. it really had an impact. cbo is estimating the interest costs is costing us money. it is pretty clear that this is not going to get any better going forward. it will be worse. this is a really bad way of doing things.

we need to get rid of this. having said that, we need budget rules. we need to find a way to be credible. the debt ceiling approach is the wrong way of doing it. >> thank you, mr. chairman. >> thank you, senator. >> i want to pursue that question a little bit. this is on my mind also. my experience is the political system find it awfully difficult to say no to constituents. with reelection in mind or a natural human tendency to want to please people rather than disappoint them. i had the privilege of meeting with christine lagarde from the imf. i asked about the reforms that

were taking place in europe. i asked, would any of these reforms be taking place without europe being in a fiscal crisis mode? her answer was, absolutely not. unless the revolver is at the temple of the politicians with the finger on the trigger, they're not capable of summoning the collective will to tell the people that represent that they need to take steps to resolve a problem and will cause disappointment and pain to do so. my experience in the years i have had in politics was exactly that. we never would have gotten what we did in 2011 without the threat of defaulting on our

debt. to think that we could put a structure in place today that perhaps we would all be comfortable with in terms of solving our long-term problems and be assured that 10 years or not that congress would not have modified that dozens of times to the response of into joints who are banging on the door and saying this is to develop much pain, we could hardly sustain a policy for months around here, let alone 10 years. if you want to fix the long- term situation, i think there is consensus that we cannot get from here to here to provide that kind of growth and what we want to hand off to future generations. we have to factor in a big

factor of the political system here in the way politicians think and react. we need leverages in order to address that. i'm not really asking for a response. you have already answered to that. you have stated your position. i just wanted to add my two cents worth in terms of why i think it is important we have the leverage points. maybe there are other ways of doing this, but my experience is that the next congress or the current congress can undo that in a big hurry as the constituents line up outside their doors. thank you, mr. chairman. >> can i -- in response? >> yes. >> in the case of putting the revolver against the -- in the case of europe, we do not want to do this on a regular basis. that'll be a problem for our

economy. people will not be engaged unless they have clarity in this thing. i have more faith in this institution. after the end of the day, you do the right thing. if you look at the history of this body, it roughly comes up with the right answer. we have not dealt with the debt ceiling since the beginning of this country. i think we are very capable and we can do it. >> i will respond by saying that we have been trying to deal with our cascading debt and deficit for decades. i would say that we have been far short of doing the right thing to look for a healthy fiscal future. >> thank you, senator.

>> i agree that we usually do the right thing but only after we try everything else. the time has come. i see this as a scary time. we need to protect our fragile economy, but it is also an opportunity to move forward. my first question is based on your predictions -- what do you think the timeframe is for possible further downgrades from the credit rating agencies? >> this is my interpretation. i do not know for sure, but this is a guess from my

experience. i think people outside of the beltway have a lot more faith in you than you do. there will not be a negative reaction. by the way, i would counsel -- you will get a better deal. >> in other words, a deal that does not mean much would not help us? >> in order to avoid a downgrade in the u.s. treasury debt, we need something lows to fiscal sustainability. we need to get to $3 trillion. if we fall short of that, that

is a problem. >> ok. you brought up social security. don't we need more reforms to make that more solvent? if we were to embark on that and set up a commission, i think there is a lot of talk of ok, we should do that. >> i think that is a perfectly reasonable way to do it. >> my colleagues said that in the near term he would rather see rates go up on the wealthiest americans because he believes it gives us a greater long-term chance to reform the tax code. do you agree with this assessment? also, do you think this is a wise course? i support going back to the

clinton levels. do you agree? >> i think we need to do both. if you are going down my path, we need both. there is no way to get to that number with tax reform alone. if you consider we will not take away a charitable deduction and if your goal is not to raise taxes from lower and middle-income houses. there is no way to do the arithmetic. there is no good way of doing it to raise that kind of revenue. we need to do both. we need tax reform and we need higher tax rates on upper- income households. >> it seems to me you could do the tax rates at the end of the year because then you could make the kind of deal that you

want. to some of the closing of the loopholes. you could bring the corporate tax rate down and work on the debt by closing the loopholes and subsidies. >> tax reform is complicated. nail down a framework and then go to work and try to figure this out. in terms of corporate tax reform, that is absolutely necessary. the goal would be to make that revenue neutral. you want to bring down those corporate rates. >> what did you think of senator coburn's assessment? >> i have a great deal of respect for the senator, but this, i disagree. it would accomplished very

little in terms of economic efficiency. with unemployment still high and -- we need to seek ways to make ourselves a friendly place. i am very concerned that i have seen the president continues to say that 97% of small businesses would not be affected. it is a very misleading statistic. anyone who has any profit from a sale on ebay would have -- we would be calling them a small business. more than half of the income is in that bracket. i strongly disagree. >> they're willing to make some sacrifices as long as we really are on the right path. they see that as their own

long-term liability. thank you to both of you. >> thank you to my colleagues from pennsylvania. i would like ask dr. hassett -- the president's proposal had some specifics. i think it is clear there is a headline tax increase that he wants $1.60 trillion. what the administration would describe is $600 billion in spending reduction. it looks like 200 billion of what they put under the 600 billion is revenue. fees and various other forms of revenue.

that is not spending restraint at all. there is a deferral of the sequestration. i am not clear how long that referral is meant to be. for one year, that is $100 billion. then there is additional stimulus spending and other things that add up to about $100 billion. that is $400 billion in the way. you should legitimately deduct from the headlines 600 billion if he wanted to write what might be legitimate spending restraint. if you go back, $1.60 trillion of new revenue, maybe we have $200 billion in spending restraint, it is it fair to say that this is a 8 to 1 ratio? >> that is about right. >> eight times the spending

restraint. >> that is right. there is some recidivism here in the sense that spending reductions have systematically been overstated in recent years by the president. it appears to me that there is a lot of tax increase and almost no spending reductions. >> spending programs that you launch, that money gets spent. promises of future savings? much less so. when the president talks about new stimulus spending, i am not sure the savings would materialize at all. in reality, the president's proposal is almost entirely of new taxes and virtually nothing that is specific of the spending restraint. your research suggests that the most successful point of

consolidation are those in which the ratio is almost the reciprocal of that. >> i can say with absolute certainty that a consolidation that has the shape of the president's proposal would fail. in the economy that we have now, in that kind of a world, it is impossible to envision generating the kind of healthy economic growth that the government is willing to have the spending cuts we promise to do two years from now. we will be saying, we cannot afford to cut government spending because it will throw us into recession. >> that brings me to the next issue i would like to discuss. to get to the president's tax increase package that he is looking for, he is calling for higher marginal tax rates. in addition, a reduction in the

value of deductions and other expenditures. higher taxes on capital gains, dividends. the way i count this up, if you include the limitations, the top marginal tax rates for some would be between 41 and 45%. that is just the federal level. we have states with varying income tax rates. some americans would be paying more than half of their income. it would exceed 50%. if the president got all the tax increases that he wants, is likely that could precipitate a recession? >> it is not only likely, it would certainly do so. it is cataclysmic. if we go from a 15% dividend tax, to 45%, that is ridiculously bad news for an

equity markets. it is something we saw on the other side. call for response to the dividend tax reductions and there was a lot of positive movement. as a package, there is a question of how negotiations work and maybe you want to start negotiations with an extreme position, i cannot imagine anybody looking at proposal and not arguing that it would not throw us into recession. >> rather than taking an extreme that is very harmful, you look for areas where the other side to meet halfway. for instance, because of the political imperative that has been created, if revenue has to be part of this, shouldn't at least be generated in the way

it does the least economic harm? in your view, would you do less economic damage by generating revenue through reducing the value of expenditures than raising marginal rates? >> if you phase it in far in advance, for example, changing social security benefits when i retire now, he would have a positive growth the fed right now from the spending cuts because she would give clarity to all the people worried about the future of america. >> my time has expired. >> good morning. health care inflation is a significant driver of medicare escalating before us, what do you think should be done to

control that inflation? i heard what you said about medicare. that is -- no matter what you do, you still have this inflation going on. it is major. >> let me say a few things. health care inflation in the last couple of years has slowed quite sharply. it has been about 3.5%. it is very positive developments. some of that probably is due to the weak economy, which means less demand for services. some of its likely is do to the affordable care act. there is growing evidence of that. we do not know for sure. there are some positive

experiences in the affordable care act that could reap benefits. the insurance exchanges, the independent payment advisory board. we will have to see how that works out. most encouraged about the cadillac tax. this is a tax on gold-plated health insurance policies for folks like me. i get a very good health care package. if i get sick, i am unfettered in terms of my health-care consumption. it will make it more costly and i will start shopping for health care. that will create more transparency and get the growth in health-care costs down. we do not know what is going to

work, but there are some interesting new programs that have potential. we should see how those worked out before we engage in some very significant structural changes. like a voucher program. we may have to go down that path, but it is much too premature to do that. we should see how these developments work. >> following up, "if temporarily going over the cliff is necessary to achieving a good agreement, lawmakers should not hesitate to do so." how long do think we could stay over the cliff without doing significant damage to the economy? >> i think you could go into early february.

by early february, it looks like you are not coming to a deal and investors began to discount the likelihood you're not coming to a deal, you will see stock prices decline, the bond market reacted. by mid-february, it would be doing a lot of damage. by the end of february, the debt ceiling, of really bad things will happen. you have about a month. a lot does depend on whether the treasury is permitted to freeze withholding schedules. i'm going under the assumption that they can and will do that. >> a bad deal -- no deal is better than a bad deal. going back to, i am curious about, given your findings, do you believe the tax cuts for the first $250,000 in income

should be extended immediately? is there any reason that it should be tied to tax cuts for the wealthiest in our nation? >> i think there should be done as a package. i think it will create brinkmanship. the nailing down the tax code, nailing down the spending cuts, nailing down long-term sustainability, you have to do this all once. that is the only deal that works. >> you think that you can be done by the end of the year? >> no, i am skeptical. i think it can be done before significant damage. i am playing a political

observer, but my guess is that we will have to go into next year. >> vice chairman brady. >> chairman, i apologize for being late. thank you for your leadership. you have been a terrific leader, a tremendous to work with. i appreciate your approach and how you handle yourself. thank you very much. i think there is a bit of consensus in the sense that it is irresponsible to voluntarily go off the cliff, but equally irresponsible to come to a solution that does not address the key issues facing us. spending discipline, of fixing a broken tax code, and dealing with our biggest challenges. economic growth works. average recovery in this

recession might have cut the deficit to $430 billion. returning to the pre-2008 levels. what is missing today, we know consumer spending is above what it was before the recession. government spending is above what it was before the recession. business investment, that area is what continues to lag. in your view, do you think raising taxes on the two marginal rates as well as capital gains dividends, does that encourage more business investment in the economy? >> the threat of those increases is a very big negative. mr. brady, one of the things economists use when they teach graduate classes is something

called the handbook of public economics. you had to study that, too, mark. i know i did. one of the later editions, there is a chapter on how taxes effect business spending. we go into a very gory detail about how negative this can be. if the dividend tax is going to go up, a lot of firms would be hurt significantly by that. they would be paring back their capital spending in anticipation of higher taxes in the future. businesses will look to the future when they decide what they're going to do. they are not investing. you see it's in the investment data.

it is why this recovery has been so slow. businesses have a lot of cash and are not making a lot of investment. >> your point is this does not help the economy. >> you could go back to the writings, he was a scholar who identified very early on that business cycles, recessions, and recoveries tend to be driven by investment because consumers are pretty steady, but investments can be fluctuating. his view of the problem of stabilization policy was to try to stabilize investment and not to focus on consumption. one reason we have had such a disappointing recovery is that we have not address the fundamental reason why investment is so weak. we are a really unattractive

place for investors to invest right now. >> why don't you just accept a higher tax rates? it would be politically very convenient. it does not solve the economy. it does not solve the deficit. it is not a serious deficit proposal. the credit rating agencies are looking for a plan that lowers the gdp to debt ratio. i do not think there is a magic number. social security, medicare, to find a sustainable path for word on them. do you think the president's plan adequately addresses the sustainability of medicare and social security? >> i think he needs to go

further. i do not think it is enough. i believe the proposals are good ones. i think they are hard proposals to make because they're substantive. to achieve fiscal sustainability in the context of $3 trillion in 10-year deficit reduction, i think we need to do more. >> looking at the republican plan and the president's proposal, do you see any common ground? >> the common ground is that we're looking at the same proposals. cbo has scored a number of different approaches. i also think there is no general agreement in the context of the current discussion, we will not make any major structural changes to these programs. we will not block grant medicaid, and we will not voucher or premium support

medicare. in this context, it becomes dollars and cents. this is not going to be easy. i would suggest that in this quest for more reform to medicare and medicaid, if we can say by the 10th year of the budget horizon that we are on the right path, i think that is ok. entitlement reform -- >> the number is whether we have solved the problem. >> entitlement reform is tough and you cannot do it in 10 years. this is a long-term problem. we should be thinking about this in a 20 or 30-year horizon. cbo scoring makes it incredibly difficult. we don't want it to force us to

make -- >> i would like to take a step back and step in a slightly different direction from the fiscal cliff and talk more about long-term and medium-term economic realities we face. in your written testimony to this committee, you warned against kicking the can down the road indefinitely because of the adverse effect that might have on the economy. the medium and long-term impact it might have. i thought your analysis was definitely something we need to pay attention to. as you observed in the failure to make progress in this area now could signal that we have

bigger troubles ahead. the moody's analytics model that you used breaks down about 2028. the reason it does that because at that point, the interest on our national debt will start to cripple our economy. we will be left without much recourse. i'm not sure there is a tax increase on the planet that could suddenly fix that. i'm not sure we could print money fast enough. if we did, we would go the way of argentina. i tend to think of this medium and long term risk as the fiscal avalanche. the cliff is something we are approaching now and we can see where it is. we know will hit the cliff. the avalanche is different.

the only thing you know about avalanches, you know when the conditions are present. you know when the snowpack has built up to the point where it could happen. you do not know when it is going to happen, you just know it is coming. once it hits you, the avalanche becomes completely impossible to control. do you agree with this characterization about the avalanche? could you elaborate about that kind of threat? >> would you mind if i steal that from you? i will give you credit. i think it is right. i do think -- that is why what you're doing now is so important. this is a once in a generation opportunity for you to nail these things down.

we're not that far apart. i really do not think we are. if you are able to put us on a credible path to fiscal sustainability, do it in a balanced way, i think we are golden. i think we will avoid that avalanche. if we do not do that, ultimately, it means we will never do it until we're forced by that avalanche. >> how soon will we need to do that in order to avoid the conditions? >> i do not know the answer to that. my model breaks down. it will happen long before that. >> it could happen within the next four or five or six years. >> here is the thing. the problem is, if we do not address this, we will be stuck

in this slow growth netherworld of going forward. we will get nailed by something. i do not know what it is, but something bad is going to happen. that is going to be the thing that sets off an avalanche. >> a credit downgrade? >> something we are not even contemplating. we do not know what that will be, but it will happen. we will set ourselves up for that avalanche. that is why it is so important to get this right. >> what about a credit downgrade? if that were to happen, doesn't that call into question all kinds of things? money market funds and other types of investment funds are chartered to invest only in a certain grade of funds.

if all the sudden u.s. treasuries were downgraded, wouldn't that have a pretty significant the fact on where we are relative to the avalanche? >> if there is downgraded treasury debt, this would likely trigger other downgrades. bank debt, they will get downgraded. jpmorgans of the world. money managers have in their relationship with their clients agreements not to invest in bonds that have rates below a certain grade. they will have to divest themselves because of the downgrades. this will cause problems in the credit markets. the credit markets will ultimately adjust. the reality has not changed.

you will see hedge funds and private equity firms, but that is the process. it will take time. between now and then, it will create a greater amount of turmoil. it is what this means. it means that we do not have the political will to nail this thing down. and we will not. people will recognize that and we will go nowhere. >> if you want to preserve the entitlement, get us to balance. >> get us to sustainability. >> thank you, mr. chairman. >> i have one more question. i know we could be here a while if we had the time. i am grateful for the patience of witnesses. i was looking at the testimony and on page 8, he walks through the question of this balance of

how you do the balance between cuts and revenue. in the second full paragraph, he says, using a range of different methodologies, the average unsuccessful fiscal consolidation relied upon a 53% tax increase, 47% spending cut spurred a successful consolidation consists of 85% spending cuts. i want to get your sense of that. whether you agree with that 85- 15. if not, why not? what would your approach be? >> i respect kevin's work a lot. i think that number varies considerably depending on the country and it depends on where the economy is in the business

cycle. it also depends what the reserve is with respect to monetary policy. it is one thing if interest rates are 4 or 5%. it is another thing if we are at 0. there has been a lot of really good work revolving around these issues and trying to get good benchmarks for fiscal consolidation. a really great paper came out of the imf the last couple of days on this issue. it makes a very strong case that there was a fiscal speed limit. you cannot have too much fiscal consolidation too quickly. it becomes counterproductive. this balance between tax and spending in the context of the u.s., particularly when the economy is weak, the spending multipliers, when you cut spending, they are very large, much larger them was previously

thought. i did not buy into kevin's 85- 15. in the context of where we are today, that is not right. having said that, i would do something like that proposed. two-one kind of ratio. if you do that, that is balanced and it did system reasonably good place. it gets us to fiscal stability and avoiding the avalanche. it is still more spending than tax, but it is more balanced. the last thing i would say, we're talking about taxes and spending, this is an important point. tax reform is spending cuts. there is no difference. if i give you a mortgage interest deduction or cut you a check. no difference. from an economic perspective,

they are one in the same thing. that is a spending cut. >> i do not have anymore questions. >> looking at our global competitors who find themselves in financial crisis showed more than 20 times in nine different countries, those countries cut what they owed in their spending and grew the economy at the same time. they did that because their cuts were large, credible, politically difficult to reverse. there were real and they were believable. it created the confidence to grow an economy. it was proven over and over again. that is the model for this fiscal cliff discussion, making

both the cuts and the reforms that are real and credible and politically difficult to reverse. that is the only signal we can send. it is the right signal to send to investors that we're serious about getting our financial house in order. chairman, thank you. this is your last committee meeting and you will be missed. >> going back to the analogy of the avalanche, when we had the subprime crisis, and there was no warning. likewise, we did have the same type of avalanche come tomorrow. there is no more confidence, nobody buys are debt.

-- buys our debt. we would have increased interest rates and huge economic problem. we have two things in front of us. not only the fiscal slope, but also the debt ceiling. treasury estimates at the end -- we have until the end of february. in solving it, would be better to put the debt ceiling in the package with the fiscal slope for a comprehensive solution? or would it be better to do them separately? >> they should be done together. this will not work if we break this thing apart. we need to scale back the cliff. we need to raise or eliminate the debt ceiling. we need to achieve fiscal sustainability. this needs to be a package. it has to be done very soon. >> i agree.

>> i want to thank both of you for your testimony. >> thank you very much. i appreciate your good work and your leadership. thank you for your testimony. i think we made in 90-minute meeting. that is pretty close. that is pretty good. i want to thank both of our witnesses again for their testimony. by the way, without objection, the full text of your opening statements will be in the record of this hearing. we're grateful because it is clear to most americans we do have a substantial challenge with regard to the cliff. we know if we do not take the right steps, it could jeopardize our economic recovery. we cannot afford to lose ground on the gains we have made. i am confident we can get this done.

the congress of the united states can successfully reached the compromise we need to assign a path to fiscal stability. this is my last hearing. vice chairman brady mentioned it. i have enjoyed this work as chairman and as a member of the committee the last six years. i am looking forward to more work on this committee as well. our work on job creation, deficit reduction, manufacturing issues and other issues has been informed by the perspective of many of our nation's top economists. two of them are with us today. and from other leaders in the business community and the non- profit sector. we're grateful for those insights as we seek to get answers. i also have a great working relationship with vice chairman brady. i am grateful for his work and the work of both parties on this committee.

i would also like to recognize three retiring members. senator bingaman has served on the committee continuously from 1987 forward, 25 years of service. congressman from new york served from 1996-1998 and from 2005 until the present. they will all be retiring from congress at the end of the year. the record will remain open for five business days for any member of the committee who wishes to submit a statement or additional questions. if there is nothing further, we are adjourned. thank you. [captioning performed by national captioning institute] [captions copyright national cable satellite corp. 2012]

>> explore the history and literary culture of new york's capitol city albany. this week on "book tv" and american history tv. up next on c-span, shaun donovan discusses the finances of the federal housing administration. then the senate debate on that debt ceiling.

followed by the joint economic committee hearing on the so- called fiscal cliff. >> extended unemployment benefits for workers who have been jobless for more than 26 weeks expire in january. the exploration -- the expiration is part of fiscal cliff. on "washington journal", we will look at the expiring unemployment benefits. then our roundtable with michael tanner of the cato institute. "washington journal" is live every day on c-span at 7:00 a.m. eastern. >> the chief of staff had to make the plan for the invasion of japan without considering the atomic bomb. it was estimated the land on -- would cost 250,000 of our men, and 500,000 on --

>> as harry truman's grandson, i have to choose to honor -- the sacrifice and the sacrifice of american servicemen fighting their way through the pacific and of a little girl who died as a result of the atomic bombing. it is unimaginable what that must have been like to be close to that, to the hypo center, where the blast was strong gusts. >> follow clifton truman daniel on his trip to hiroshima. he discusses meetings of bomb survivors and the inspiration for his trip at 9:00 p.m. eastern. housing secretary shaun donovan today said he could not guarantee the federal housing administration would be able to avoid using taxpayer dollars

next year to shore up its home mortgage fund. this senate banking hearing comes after a government report projecting as $16 billion deficit in the f.h.a. the mutual mortgage insurance fund. this is an hour and a half. >> i call this hearing to order. thank you for joining us, mr. secretary. i asked you to testify today because i am deeply concerned about the recent report that the f.h.a. could potentially need taxpayer support for the first time in its 78-year history. i would like to help the committee gain insight into the fiscal challenges at the f.h.a. and what h.u.d. has done and can

do to mitigate losses and address the shortfall in the capital reserve ratio. f.h.a. has been helping save -- by ensuring that qualified lower to moderate income and first time homebuyers have access to mortgage credit since 1934. since the beginning of the financial crisis, the f.h.a. has increased its market share from below 5% in 2006 to about 30% at its peak volume in 2009 in pursuit of that mission. this cyclical expansion was essential to the mortgage market, especially for first- time home buyers who comprise 78% of single family loans insured by f.h.a. in 2011.

f.h.a.'s multifamily and healthcare insurance programs have also played an important cyclical role since the financial crisis with a fourfold increase in volume from 2008 to 2011. according to mark sandy -- mark zandi, without the f.h.a.'s at cyclical part, the housing market would have taken the economy with it. all with providing the backstop. the losses at f.h.a. stem from the now prohibited -- down payment program. heavy losses in the reverse mortgage program and losses and loans made at the height of the crisis to prevent -- of the

housing market. while hud has taken some action to prevent the mutual mortgage insurance fund for single family loans from taking federal funds, the f.y. 2012 report suggests that much more needs to be done to prevent such a draw. i want to hear more today about the administration's actions and proposals to manage the risks to taxpayers stemming from -- of business and what safeguards will ensure the quality and sustainability of the new books going forward. the administration's actions and proposals will not be sufficient to restore f.h.a.'s fiscal health. then i plan to work with my colleagues and both sides of the aisle on the banking committee to find a bipartisan way to make

that happen. before i return to rank and member shelby, i want to recognize his work as ranking member on this committee for the past six years. this may be our last meeting together this year, and we will have a new ranking member next year. part of our bipartisan record over the last two years would continue the tradition of bipartisanship that this committee has been known for by passing four significant bills together this congress. i thank senator shelby for his service. with that, i turn to ranking member shelby. >> first of all, i appreciate your remarks. i have been on this committee 26 years. i am not ending being on. i will have to move down a notch. as i go over to be the ranking on appropriations. i will not be far away.

i will not be far from the secretary on h.u.d. stuff, either. i enjoy working with this committee. i enjoyed being chairman of this committee. the people on this committee are superb. the staff is superb. this is a very important committee, not only for the senate but for the american people and perhaps the world. as most people know, people are active on this committee because banking and housing and everything that goes with it goes right to the heart of what ticks in america -- job creation, availability of money, the regulation of banks, the securities and exchange commission, money-laundering, sanctions on iran, you name it. this is an active committee. so i will be around. but i will be yielding, moving down one notch next to senator

crapo. having said that, welcome again, mr. secretary. just days after the president's re-election, the f.h.a. released its 2012 actuarial report which revealed that the economic value of the f.h.a. fund has fallen to negative $16 billion. that means the fund's capital reserve ratio now stands at a negative 1.44%. this news is a very disturbing to us and to the secretary. for those of us who have been concerned about the health of the f.h.a. for years, the problems of the federal housing administration have unwell loan. during the housing boom, the f.h.a. guaranteed millions of risky mortgages with low down payments. we are reaping that now. these mortgages have resulted in

billions of losses to the f.h.a. the federal housing administration has made matters worse by failing to come to grips with the magnitude, mr. secretary, of the problems. in 2007, as the federal housing administration's poor financial position was becoming clear to all, including this committee, i urged the f.h.a. to devise a credible plan to improve its finances. i stated then "before the taxpayers are faced with greater losses, i believe we must determine how the f.h.a. got into this position and how it intends to get out." unfortunately for the past five years, the f.h.a.'s leadership has understated their problems and saw to kick the can down the road. this is now the fourth year in a row the f.h.a. fund has been below its statutory minimum

capital levels. yet, each year, we are told that this is a temporary dip. and that within a few years, everything will be fine. in fact, in 2009, mr. secretary, you told this committee that the drop in the capital ratio was expected to be "temporary," and it would "return above 2% within the next two or three years, even if f.h.a. were to make no policy changes at all." we now know this forecast was way off the mark. the administration continued to be optimistic. in 2011, for example, h.u.d. still had its projection showing the f.h.a.'s capital ratio reaching 2% in 2014. now, despite all these reassurances, the actuarial report projects that the f.h.a. fund has a capital reserve of a

negaitve 1.44%. and what is the response of the f.h.a.'s leadership? just this year, after further declines in the f.h.a. fund, secretary shaun donovan and acting f.h.a. commissioner carlo gallant, testified that the fund would return to the congressional mandated capital ratio of 2% by 2015. i am not nearly as optimistic about the future of the f.h.a. the inability of f.h.a.'s leadership to clearly recognize and address its problems is raising doubts about their credibility and their willingness to properly manage f.h.a.'s finances. i think it is time for f.h.a. to face facts. we have to. first, the capital reserve housingf the federal

administration's fund is dangerously low. second, the fund's capital ratios have been below f.h.a.'s statutory obligations every year since 2008. third, every year since then, future growth in the capital ratio has underperformed in relation to f.h.a.'s predictions. hopefully, the shock produced by these latest -- the shock produced will finally be a wake- up call for everyone. hard choices lie with this program. f.h.a. leadership must fully realize its existing authority to shore up the value of this fund. additionally, congress must consider reductions in permissible risk layering, further underwriting reforms and reexamine -- a re-examination of previous structures. it is time to get serious reform

of f.h.a. before it needs a taxpayer bailout. if it is not too late already. i wish you well, mr. secretary, but you have a real challenge. we do with you. thank you. >> thank you, senator shelby. are there any other members who wish to make a brief opening statement? >> thanks, mr. chairman. just briefly, i want to agree with the comments of our ranking member, mr. shelby. our general concern is that we have seen this coming for a while. we have been talking about it, and the response from the administration has been very modest. unforeseen of the, our worst fears are coming true. and even today -- unfortunately our worst fears are coming true. today, i am concerned that the response is too modest. in discussing last year's actuarial report, the acting commissioner carol gallante

saida there is no evidence that housing prices will decline to the kind of levels that would require a bailout. yet right now, the question is quickly becoming not if but when. and still, even in the testament, secretary's testimony today, we are only talking about things like waiting until the second quarter of next year to raise premiums and then by 10 basis points. i would really urge the secretary and others to consider other more aggressive, more proactive measures. even "the washington post", which is not exactly a right wing think tank said recently right now the critics are starting to look pretty prescient. affordable possession of one's own home is the american dream. government support for excessive

borrowing has turned into a national nightmare." and the focus of that editorial was we still have not fundamentally reformed that, including at f.h.a. so i hope we start getting on that track starting today. thank you. >> senator menendez? >> thank you very much. i will be brief. but i look forward to hearing the secretary's response on how f.h.a. balances the goals of remaining self-sufficient without taxpayer funds but also helping what is still a fragile housing market in ensuring first-time homebuyers can get credit. there is a clear case to the main to that but for f.h.a., in the midst of this housing crisis, we would have a far greater crisis on our hands. so recognizing -- reconciling the fiduciary responsibilities to the taxpayers as well as the

mission to the people of america is important. i look forward to hearing that. with your indulgence, mr. chairman, it comes to my time for questions, while i care about f.h.a., i have an even more pressing issue in the state of new jersey. after thousands of homes were lost, lives were lost. and we are facing the greatest devastation the state has ever had, the secretary has been charged by the president in that regard to be the czar, whatever the appropriate title list, and i will have some questions on behalf of my state. thank you. >> i want to remind my colleagues that the record will be open for the next seven days for opening statements and any other materials you would like to submit. now i would like to briefly introduced our witness, the hon. shaun donovan. he is the 15th secretary of

housing and urban development. this is his ninth time before the committee. secretary donovan, you may proceed with your testimony. >> mr. chairman, thank you. members of the committee, to watch for the opportunity to testify today. i want to add my thanks to ranking member shelby. this is an important moment for our housing market and our nation's economic recovery. as 2012 draws to a close, there are encouraging signs -- housing construction growing faster than at any time since 2008, the strongest year of home sales since the crisis began, and rising home values lifting 1.3 million families above water in the first half of the year. f.h.a.'s programs have then a critical component of this recovery. that should come as no surprise given the program's goals and history.

with the mission of providing access to home ownership for underserved populations and critical financing for multifamily developments, nursing homes, assisted living properties and hospitals, the f.h.a. is designed to fill gaps in the market, and act as a stabilizing force during economic distress. it is clear that f.h.a. has done that. by ensuring liquidity in the nation's mortgage finance markets, f.h.a. was a stabilizing force as we experienced the worst economic decline since the great depression. in the last four years, the f.h.a. has made homeownership possible for 3.5 million families, including 2.8 million first-time buyers and for 50% of all african-american and latino buyers last year. while f.h.a. has acted as a support, it has not been immune to the stresses of falling home values and rising unemployment of the recession. according to the independent actuary's annual report on the mi5 fund, the capital reserve ratio fell below syrup to -

1.44%. -- to below -1.44%. as stewards of pat -- taxpayer dollars, we have made it a priority to strengthen the fund and we are continuing to take aggressive action to return the fund to fiscal health, including those measures announced in our and report to congress. it is important for me to start by highlighting several key points. fully $70 billion in claims are attributable just to the 2007 to 2009 books of business. these are the major source of stress to the fund. in its report, the actuary attests to the high quality and profitability of the books insured since 2010. it is important to understand this report does not mean that it will be necessary for the f.h.a. to use its authority to

draw from the treasury to cover projected losses. while this possibility exists, it is dependent on several factors. first, that determination would be made using the assumptions in the president's budget to be released in february, not the assumptions in the actuary's report. second, we expect the new books of business generated after 2012 will create $11 billion in economic value, further strengthening the m.m.i. fund. third, since the actuarial report is a snapshot, it does not take into account changes f.h.a. made to address the health of the fund. the final accounting of any shortfall would be done at the end of fiscal year 2013 in order to determine whether funds from the treasury are necessary. i would like to address the primary drivers of the decline in the capital reserve ratio as compared to last year's projections. first, the house price appreciation estimates were

significantly lower than those used last year. that may seem counterintuitive given the economic progress we have seen, but the turnaround in the market occurred later than projected in last year's forecast. in addition, for technical reasons, the forecast is somewhat artificially dampened by the increase in refinancing activity in the market this year. second, the continued decline in interest rates, while good for the economy, impacts the model by indicating higher defaults as well as in lost revenue to f.h.a. as his borrowers pay off their mortgages to refinance at lower rates. third, based on recommendations made by the g.a.o., and h.u.d.'s i.g. in this year's report, the actuary changed the way it reflects losses from reverse mortgages and defaulted loans. let me be clear. these are all important factors to consider when explaining the current status of the fund, but they do not minimize the seriousness of this report.

as i said at the outset, we have taken actions to protect and strengthen the fund, including premium increases and changes to credit policy, such as increasing down payments for lower credit score borrowers and ending seller financed down payment assistance. with your help, our efforts have added over $32 billion to the fund. the measures i will outline today further address the primary source of the problem -- losses stemming from legacy books of business, those insured during 2007 to 2009, and are designed to reduce our loss severities by 5%, generating $3 billion in economic value over the next two years. we announced changes to our loss mitigation program that targets deeper levels of relief for struggling borrowers to assist families in meeting their obligations and avoid foreclosures for f.h.a. we are streamlining the use of short sales and aligning our practices with those announced by the ftse to provide more

families -- the gsse to provide foreclosure. we increased the use of alternative dispositions for defaulted loans, including are distressed asset stabilization program. the recovery to f.h.a. from this program is estimated at $1 billion this year alone. we are taking measures on new loans. we are reversing a policy change made a decade ago that allowed borrowers to stop paying premiums after their loans reached a certain loan to value ratio. this left the f.h.a. without premiums to cover the losses on loans held beyond the period for which those premiums were collected. reversing the policy will improve the value of the fund by $2.60 billion in this fiscal year. in addition, we will raise our annual mortgage insurance premiums by 10 basis points. this will increase cost to new borrowers by $13 per month, but it will further reduce our footprint in the market while

adding $1 billion of additional economic value to the fund this year. as private capital returns, f.h.a. must continue to balance pricing to ensure it occupies a smaller share of the market. f.h.a.'s market share has been declining since 2009. 2012 represents our lowest volume year since the start of the economic crisis. while i focus on f.h.a.'s single family programs, i want to reassure the committee their efforts to protect insurance funds span the range of our programs. we have raised our mortgage insurance programs on multifamily and healthcare loans and instituted other reforms such as special reviews for large loans, reviews by credit risk officers, and in active loan committee process. even as we use our authority to take these measures to protect the fund, other actions require your partnership. in addition to the increased indemnification authority and geographical enforcement powers passed by the house, we have a number of proposals designed to

place f.h.a. in a stronger fiscal position over the next 12 months, including new loss mitigation authority, additional enforcement, and greater administrative flexibility in managing the reverse mortgage program. the house passed a bipartisan f.h.a. reform legislation and we look forward to continuing to work with both chambers to create tools we need to strengthen the program, meet its mission, and place the m.m.i. fund back on firm footing. i encourage the senate to engage in discussions that build on this process in the house in order to achieve a consensus that will give f.h.a. these tools as quickly as possible. there are no guarantees the actions i have described will prevent f.h.a. from tapping into the treasury next september. however, swift action from congress, coupled with the $11 billion in additional value from the new fiscal year 2013 business, will reduce the likelihood that the treasury draw will be necessary. these changes as well as those

we made over the past four years have laid the foundation for a stronger f.h.a. and a healthier m.m.i. fund that supports the recovery of the housing market while actively reducing f.h.a.'s market share. as we work together to reform the f.h.a. program, we must proceed with a balanced approach that recognizes the challenges to f.h.a. and its contributions to our economy. we are eager to work with you to achieve these goals. thank you again for the opportunity to testify. i look forward to taking questions. >> thank you for your testimony. as we begin questions, i will ask the clerk to put five minutes on the clock for each member. secretary donovan, i am very concerned about the f.h.a.'s fiscal condition as detailed by the f.y. 12 report, particularly the negative capital reserve ratio. what action have you taken to restore f.h.a.'s kept in reserve and prevent f.h.a. from

requesting taxpayer support? >> mr. chairman, the most important actions we have taken have spent in partnership with this -- this committee. i would recognize the fact that you passed a ban on seller- funded down payments which we implemented in 2009. that action alone, we believe, has saved the fund about $12 billion. there are additional actions we have taken. we have raised premiums four times, made underwriting changes that include raising down payments for the riskiest borrowers. that series of changes has added we estimate an additional $20 billion to the value of the fund. simply, if we had not taken those actions in partnership with you, we would find ourselves in a worse position

today for the f.h.a. fund. >> mr. secretary, you have detailed several steps that would help stabilize f.h.a.'s finances. given the condition of the f.h.a.'s old books of business, why weren't these changes made earlier? will these changes allow the f.h.a. to outperform projections again this year and avoid drawing funds from the treasury? >> as i said, i cannot guarantee that we will not need to draw at the end of the fiscal year. what i can say is that i believe we are taking all appropriate steps to try to avoid that -- balancing both the health of the fund but also the fragile recovery that we have in the market. for example, we have already moved to increase premiums for

the fifth time. we believe that that is an appropriate step and that it leaves f.h.a. appropriately priced. we would be concerned about going significantly further in raising premiums, both because it would have potential negativ e impacts on the housing market. we are seeing a recovery but it is still fragile and we do not want to hurt the market and hurt the f.h.a. fund by going too far to stop that recovery. but i would also suggest, as you see in the chart on the right, the independent actuary confirms this, the new books of business are highly profitable. and so i think there is beyond the market question a question of how far do we go in visiting the sins of the past on new borrowers? the premiums being paid by new borrowers more than cover the

expected losses. we think that is appropriately priced and will help shrink our market share. but what we need to do is focus on these older books of business. that is why i am focused in the changes we have made -- we announced in our report to congress -- on steps that will increase our collections from these older books of business. just from the asset sales we have instituted and we are going to ramp up going forward, we have increased the returns on these distressed loans by more than 10% simply with those steps. so we need to continue to focus on things. we have asked for authority from you to take steps that would help increase our returns on the older books of business. we think those are the most appropriate measures we can take. >> secretary donovan, one of these steps is better loss mitigation by transferring -- from servicers who are

underperforming. what is preventing f.h.a. from doing that under its existing servicing contracts? >> quite simply, we need legislative authority to be able to force those transfers to happen. and that is a critical step. is something we have seen in -- it i somethings we have seen in the private market starting to increasingly happen. we believe it would be very helpful to send a strong message to those servicers that are underperforming. it is not one of a number of steps we would ask you give us legislative authority for as quickly as possible. >> one more question. secretary donovan, the actuarial reports find a negative economic -- value in the m.m.i. fund is

mainly a reflection of problem legacy loans guaranteed during the housing bubble. what steps has s.a. -- f.h.a. taken to improve its underwriting criteria and risk assessments for the new loans? >> as i mentioned earlier, clearly the steps you took to down paymentnded loans were a critical piece. we also looked at the performance of our loans very carefully. so in addition to the premium increases, we did require a 10% down payment for our riskiest course. that was a very important step in changing our underwriting. we also have taken many other steps on other aspects of underwriting that have to do with what costs can be rolled into the loan and other steps

that reduce the effective risk of those loans that are quite poor. part of that has been able to be done because, quite frankly, we did not have a strong enough risk focus at f.h.a. in the midst of the crisis. we created a very strong risk management focus through the creation of a chief risk officer for f.h.a. that never existed before as well as building a team of analysts that are really providing data on an ongoing basis on early payment defaults and a range of other information that we simply did not have before in real time. so it is not only the underwriting changes themselves. it is also the focus on risk and the way we are measuring it on a real time basis that has given us new tools. >> senator shelby. >> thank you, mr. chairman. secretary donovan, lead me

through this. tell me if i am wrong on this or right or what occurred it is my understanding -- it is my understanding that statues -- statutes that the federal housing administration could if necessary to tap the treasury for an endless supply of money. a lot of us would call that a bailout. do you anticipate that? can you assure us and the american people today as the secretary of h.u.d. and f.h.a. -- that f.h.a. will not do that or you do not know yet? >> senator, i wish i had a crystal ball and i could tell you we will not at the end of the year. given the actuarial report this year, obviously, i am highly concerned about the possibility. >> are you getting close? >> certainly we are closer than we have been in the past. >> how close are you?

honestly. >> what i will tell you is that, again, an independent actuarial report is the best i can give you in terms of that view. >> that is not good, is it? the actual report is not good. >> it isn't. one important piece of this is that what is required for the actuarial is a review as if we stopped doing business on the day to day actuarial. the important thing is that we can do and that we have done to try to avoid taking funds from the treasury at the end of the year is to look at the revenue we expect this year. that is about $11 billion. and to make changes to underwriting and other steps that would help avoid that. >> does that include upping the premium a little? >> we have already moved to

increase the premium an additional 10 basis points, $13 a month. >> how much money would that be projected? >> that would add about $1 billion just this year alone and much more into the future. >> what is the size of your portfolio today roughly? >> it is over $1 trillion when you combine -- >> $1 trillion worth of loans? >> when you combine the various programs. >> and how close are you as far as working capital so to speak? >> it is an important question. today, even though the actuarial report shows a negative balance, we have a cash balance of over $30 million today -- $30.50 billion. in fact, one of the things the actuary looks at, assume we continue to do business, assume we continue to operate, what is the likelihood, which we plan to continue to operate, what is the

likelihood week -- the cash balance goes negative? despite the worst condition this year, the actuarial has a less than 5% chance that we run through all of those cash reserves going forward. >> give us the worst case scenario. is december, the first week of three weeks, satyy, from now, what is your worst case scenario, where you might be or not be? what would cause you to have a lot of heartburn, say, from the first of the year? >> the single greatest issue of concern is where the housing market will go from here. if the housing market continues to recover as it has this year, that is the most important thing that we can see to restore the fund to health. house price appreciation is the

single-most important variable in the health of the fund going forward. and that is also why i will say we are so concerned about balancing the steps we are taking to make sure we are not doing anything that would impede the recovery and come back and harm the f.h.a. in the long run by decreasing the improvement we have seen in the housing market. >> we all realize that f.h.a. serves a good purpose, but it is just not sound financially. as the secretary of h.u.d., if fiscal well-being of f.h.a. -- should that not be one of your highest priorities? >> absolutely, absolutely. >> and are you just going to do with what comes up like you outlined today? >> i would welcome additional ideas and suggestions that you may have. i certainly feel that we will

take steps within our power. we would like to work with you as quickly as possible to move additional authorities that would help us do this, but i am also opened today or at any time to additional suggestions about what further steps could take. >> if you do tap the treasury -- and other words there is a bailout so to speak -- and it is a sizable one, how would you pay that money back? >> premiums or better efficiency or the housing recovery or all of the above? >> we certainly believe that we needed to keep f.h.a. in a position where our new books of business are producing substantial revenue for the taxpayer. this year alone, we expect our new loans to return a $10 billion profit, if i can use that term, to the taxpayer. that is the way we need to

continue to restore the health of the fund. and should we need to draw on the treasury, to restore that money to the taxpayer. >> thank you. thanks, mr. chairman. >> senator reed? >> thank you very much, mr. chairman. i repeat what my colleagues have said -- it is very disturbing to have a report that shows 1.4% negative in a critical fund. and this is an issue that has not suddenly emerged. it has been growing over several years. you have indicated that you are taking steps to fix these problems. and there are many people have said that in the past. again, can you give us some assurance that this time is different? >> what i can say, senator, is

that i believe we are taking every responsible measure to improve then health of the fund, while at the same time not hurting the fragile recovery that we have. i do not have a crystal ball. and i believe we need to continue to take input and guidance on getting a better picture of the fund. one of the reasons why the fund looks significantly worse this year than it did last year, we got criticism last year from outside experts, from the g.a.o., from rig, of the way we model claims in our actuarial. we went back and directed our actuary to change the way we model. and that alone, that change alone subtracted $13 billion from the value of the fund. so i am not going to sit here and say we have been perfect in the way we looked at the fund or the way we model that.

-- modeled it. one of my jobs -- >> let me ask a related question. as you look forward in terms of the help of the fund, one factor, and i would assume it would be in the model, is the assumption about unemployment rates going forward. what unemployment rate are you assuming over the next year or so? because it directly affects payment. >> absolutely. one of the important changes we made to the model this year, not to get to wonky here, is to go to something that is called stochastic modeling. the way the model work, we chose one path and modeled based on that. state of the art modeling assigns probabilities to a who le different range of pathss the

economy might go through. we have modeled a vast range of scenarios. one of the things we looked at last year was to say, what if interest rates go low? what is going to happen to the fund? we ran that last year. that scenario predicted the fund would go negative. we have had what is effectively the low interest rate scenario happen this year with qe-3. and that has clearly had a substantial impact, roughly a $10 billion negative impact on the fund just from those interest rates alone. so those are steps we are taking. we will be happy to share with you the various unemployment rate scenarios we are looking at. but again, we look at a range of those to get to the best possible prediction. >> you are close to wonkiness with this stochastic model.

but you are fine. one of the problems you face it is the series of years of terribly mispriced loans in 2007 to 2009. it would seem to me one of the things you are trying to do is to clear these as quickly as possible. but as you indicated to us, you need help with servicing, you have to do much more aggressive modification sales, and all quote -- also for the real a state you own, you have to dispose of it. -- the real estate you own, you have to dispose of it. how much can you achieve in relieving the pressure on the fund? >> do you think with a set of changes that we are already taking, that we announced in our report to congress, that include the loan sales we have taken, changes to short sales, changes to what we call our loss mitigation waterfall, how we work with borrowers in trouble,

those alone could add about $3 billion to the fund over the next couple years. what we need help on is that many of our enforcement authorities. again, if he think about how we collect on the bad loans, enforcement is an important piece of that, to say to lenders, you made a bad loan. there was fraud or something else involved. we need to hold you accountable for that and bring funding back to the taxpayer. there are a number of provisions that would help us. one is giving us a broader geographic authority. we have some perverse restrictions right now in legislation in terms of the way we can hold lenders accountable on a narrow geographic basis. what we can do to require indemnification of loans, the standard for fraud. those are all pieces of what we would want to work with you to get past very quickly to be able to enhance our enforcement

authority. those as well would likely add billions of dollars to the fund. as you know, we have been able to recover well over $1 billion this year in settlements around servicing and originations with many of our biggest lenders. >> thank you very much, mr. secretary. and thank you, mr. -- >> senator croaker. thank you for your testimony today. you asked for suggestions and i would like to make just a few. is my understanding that on the private side right now, ficus' course -- fico socres is where it -- fico scores is where the market is. it is creating a situation where private lenders are made out to be bad guys because even though your fico scores are 580, they are not doing anything below

620. would it make sense for you to go ahead and get on up to 6 20? there is huge demand out there and at some point, that will diminish and will drive back down as people try to get market share again. would it not make sense to go ahead and implement what the market is telling you to do? >> that is something that we are actually looking at. i think it is likely that we take additional steps as we are working towards the president's budget and understanding in more detail the results of the actuarial. that is clearly something that you're looking at. we are concerned that some of the overlays lenders are putting on go farther than necessary. we do believe that there has been an over correction in some parts of the market, where we have what are very safe borrowers that are having a hard time accessing credit. i also agree we need to be looking at and perhaps adjusting

on the fico side. >> generally, for what it is worth, i appreciate your testimony today. we've had discussions about that in the past. i realize you have a lot of bad loans on the books you inherited. i do think there are things you can do now to really cause the fund to be more, far more sound. i do think you are being a little slow in moving that way. a second one i would move to is reverse mortgages. you are losing your shirt on reverse mortgages. losing your shirt. it is a small part of what you are doing. and yet, you have mortgage brokers out there that are making an absolute fortune right now, a fortune. some of them are good operators. a lot of them are sloppy operators. i do not understand why you do not shut the program down for 24 months, as has been suggested. >> was again, senator, you have hit on an issue that is an important one and we do believe

we need to make. it?hy don't you do >> we did make changes. we introduced a much safer, better alternative through our saver program. we could do what you said, which is to create a moratorium on the other program. what we are concerned about is, given the economic crisis that seniors have gone through, that we would be eliminating an option that works for some seniors if it's done safely in order to eliminate also the bad loans that are being made. our preference, if we could get authority from you to change the structure of the program to make it much more effective and safe, that would be a better way to go. if we cannot get authority -- >> why can't we do a unanimous consent? it seems to me that most people would be willing to do that.

>> let's talk about that today. >> i know you have a partial situation that has been very healthy. it seems to me if you are worried about seniors, you could keep the ability to drawdown a partial amount, which is very safe. and you would -- you could do that all by yourself and we could worry about the legislation whenever it is time. i'm willing to look at it now. for what it's worth, it does feel like there is a lot you could do to make f.h.a. healthy today that is not being done. let's talk further, ok? loan limits. it seems like right now, faniie freddie are at 625. would it make sense to go ahead and make changes that need to be made. you can do that yourself. why don't we do that? >> we supported our loan limits coming down, and they were supposed to expire last year.

congress made the decision to allow, to lower the g.s.e.'s laon live at but kept gigolo limits but kept f.h.a.'s -- loan limit but kept f.h.a.'s -- i do not believe we can take that step. >> would you like for us to help you do that? >> we have supported it before. i will state again today that going back to that limits makes real sense. i will go further than that, that we should lay out a path to go back to even lower limits that existed before the crisis in a way that is done consistent with how we do housing finance reform. that is a larger question, but the immediate step of going back to the limits is one that we would support. >> you are developing a fan. i hope we can look at some of those things. home mortgage insurance.

the way i understand works is private mortgage insurers, when you get down to a certain loan to value ratio, the insurance, the premium is dropped, but also, the insurance is dropped. and yet, you have $1 trillion in loans on your books, where the loan to value has dropped. they are no longer paying premiums, but you are keeping the guarantee in place. that does not make any sense to me. why don't you continue to make the homeowner who has that guarantee continue to make the premium payments? that would be something that seems to be would be extremely helpful to you during this difficult time. >> once again, an excellent suggestion we announced with our report to congress that we are doing that for new loans. >> why not the $1 trillion on

the books? >> company cannot go back and modify a contract. when that homeowner took that loan -- we cannot go back and modify a contract. when the homeowner took that loan, they signed a deal that said this is the way this would work. we analyze this. we cannot break those contracts. is something we need to implement. i will say, however, that the value of doing it now in a low interest rate environment is larger on these new loans for two reasons. the lower the interest rate, the faster the amortization of the principal. therefore, this will be a more valuable change. second, because these loans are so low interest rate, they will be on our books far longer. not many loans in the past have hit that limit. even though it is $1 trillion, the value of the change is small for the old loans. it is going to be valuable for these newer, very low interest rate loans. >> briefly two more questions.

i see that f.h.a. is now making loans to people who three years ago were foreclosed upon. and that is a very different standard than even exists at fannie and freddie. why are you doing that? put this is another area where we are working on changes. responsible hone owners got good credit scores that lost their jobs. we believe somebody can show that they are back to work and a responsible borer again. that is someone we would work with.

i would agree that our standards are not clear enough in dividing those. so what we believe we need to do is clarify those standards but not necessarily eliminate the possibility that somebody who has done the right thing and through no fault of their own lost a job but can be a responsible homeowner again, has the chance. the three-year limit that's criteria that we set for how somebody re-establishes their credit and being a responsible homeowner? >> my last question, thank you for your patience. there is a lot of things -- there are a lot of things that could be done right now to solve a lot of problems. things. can do now. you and i had a pretty long conversation several months ago when carol gallante had the her post on a permanent basis. administration to agree to not airdrop something and bypass the

committee. it's an unfortunate circumstance. but i guess as i look at it, i would just ask you the question, did we dodge a bullet in appointing her full-time with all the issues that we have at f.h.a.? and does she really have the ability to press the administration to overcome political issues to actually cause the fund itself to be actuarially sound? because it appears to me that we are still not quite doing the things we ought to do to make the fund operate. it seems to me maybe there's a little political pressure and maybe she's not strong enough to make that happen. >> here are the facts as i see country. police we have taken the most aggressive steps in the history of people agency to make sure the business we are doing is strong. if you look at that chart right there, you will see a huge

profitability relative to the history for the new loans we are making. we have only so much that we can do to fix the problems of those older loans. i agree with you on many of the steps you have described today. what we should not imagine is that somehow taking those steps can take us from the difficult financial condition we find them in today, somehow to eliminating what has been an enormous trauma in the housing market. i have enormous confidence that lead us oncan and will the path we should take. the evidence of the changes we have made, the steps we took, you remember last year, the president's budget thought we might need it last year.

instead of a negative balance, we ended the year with a positive balance. those were aggressive steps that she took. i listened to her, and i believe that is the kind of leadership to help us continue down this path. >> thank you. senator? >> thank you. thank you for your testimony today mr. secretary. i know the senator asked about reverse mortgages. i am concerned about that issue. i am particularly concerned that $2.80 billion of the $16 billion economic shortfall are related. can you talk a little more about why these losses are so severe? >> here is the fundamental problem, without getting into

yoo-hoo t -- into too much detail. the loans were generally variable rate and allowed the bar were -- borrower. there is basically no option for them to do anything but draw the full amount. >> why? >> we do not have the statutory authority to be able to make the changes to the program to allow us to limit the draw up front. that is the change we are asking to be made. our alternative, and i was just discussing this, we could basically eliminate or put a moratorium on our regular program, which is somewhat safer. the problem is we do not have

that authority under that program to avoid the full-draw feature of it. the right answer is to give us the authority to make the changes we need so we end up with a safer product and frankly, a safer and better product for seniors. what we are finding is too many seniors and up in a situation where they cannot cover their taxes and we lead to a situation where they have more leverage, more debt, than their home is worth by the time they are ready to sell at home. >> because of that change, that is what resulted in the huge, $2.90 billion? >> for most of the new loans we are making, they are at this full-draw, and they are -- there will be enormous losses going forward because of that feature. >> ok.

also, the last time you testified before the committee, we discussed the national mortgage sediment. can you talk briefly about the fund, how it has benefited from the settlement? >> in the most direct way, it has benefited by well over $1 billion that came directly to the fund from that settlement. or that series of settlements. also important, though, is we put in place, not just for fha loans, but for ed -- but for every kind of loans that were part of it, new standards for how they foreclose on loans, how they work with troubled borrowers, and those changes will have very important effects in the long run, because we will

have fewer foreclosures and better recovery on the loans, whether it is through short sales were keeping the homeowners in their homes. >> the debt forgiveness for the bar worse, what is taxable -- this is set to expire at the end of this year. what is the interplay and how would the ex -- exploration of that division impact? >> it would be a cruel irony if homeowners have the ability to stay in their homes because of a principal reduction that is both good for them and their lender because it will lower the losses on that loan in the long term,

only to get, come tax time, a giant tax bill for that principle reduction, which drives them back into delinquency and potentially for closure. the president has made it a real priority to try to get that provision into whatever tax extenders' we may do at the end of this year and it is a very high-priority for us. >> thank you. >> senator? >> thank you. thank you, mr. secretary. as i said at the beginning, i have the real concern shared by a lot of committee members that the changes and reforms fha has made you are talking about today are not significant enough given rigid given -- given the

looming threat. those things could be true. they could be more than every before rigid than ever before but not enough. -- they can be more than ever before but not enough. is it not right that under the federal credit reform act, it would allow the treasury to make necessary credit transfers to fha in order for them to continue making payments automatically? >> that is correct. that is the way not only fha but other similar programs are designed. >> that is obviously a significant for the taxpayer. we all care about that. can you commit to us that you will keep us and the congress fully apprised of your moving projections with regard to that?

sure> i am committed to make that if we would take that step, you would be fully and notified. >> my question was more than that. keep us fully apprised of your current an updated projection -- and updated projection. today and whenever that changes, and if that happens? >> we do provide a monthly report to congress on the status of the fund. if there is additional information or different information that would be useful to you in that. we are very happy to work with you on that. >> what i am talking about, as of today, the bailout? what is your best projection? >> what i would say is our best

projection would be contained in the president's budget. we are still working on the underlying economic assumptions that go into that. i do not have anything beyond what the actuary did that would be a different prediction. >> today, you have no best guess about that? >> i am not sure what you would suggest is a best guess. we expect $11 million of revenue and the changes we believed would bring billions of dollars of revenue. >> based on all of that, do you expect a taxpayer bailout? if so, when? >> based on those steps, i

believe we have significantly decrease the chance -- decreased the chance. i will not sign a probability at this point. we are still working on the other steps in the budget. i would be able to give you a number when we have completed the budget projections. >> i want to re-ask for your best information on that as it develops. we do not have that today. i think you have some idea of some best guess. i would like that. with regard to changes that are being made, you just said they are unprecedented and the proof is in the pudding and the changes made last year stepped us back from that possibility.

i want to add for the record there was a big factor of $40 billion that had nothing to do with reforms or changes. i also want to associate myself with the senator's suggestion about a whole menu of things we believe exists that you all are not doing that i believe is warranted. there are several ways that fha has much laxer standards. as a result, you are creating a huge magnet to the worst problems because of that. one of those is the maximum loan limit. another is the issue he brought up of allowing a borrower to re- borrow. on those two things and anything else like that, why would you not aligned fha with fannie and

freddie to n stop freddieegative -- to stop this negative election? >> it is not that the fund remaining positive last year was because of the senate -- settlement. if it had not happened, we still would have been positive. i do not see it as unrelated to the policy changes. it is part of what we need to do to make sure we hold lenders accountable and that we minimize losses from those older boat -- older books of business that are causing distress to the fund. i believe very strongly with the right policy division the right steps would be taken, and even if it happened, we would have remained positive. we do not have the authority

without congress acting that administration advocated that loan limits come down. i thought it was perverse to bring fannie and freddie's loan limit down and not lower fha's at the same time for the same reasons you said. we are concerned we would drive business that should go back to the private market. i would urge you and others, i know you are supportive, but to work with your colleagues to do that as quickly as possible. i agree we need to look at the standards for how we allow borrowers who may have defaulted in the past. we should not hold a responsible homeowner, who has demonstrated their ability to pay back their debt and be a successful homeowner, simply because they may have lost a job due to what

is an unprecedented economic crisis we have been through. this is not just about time line. it is about what the standards are for when we allow folks to borrow. >> my broader point is this and several other factors should also be about doing it in a way that you are aware of what competing opportunities' rules are. if fha has laxer standards, you will clearly encourage the accumulation. i think that is obvious. >> a few weeks ago, we established we are implementing standards on short sales that are aligned with what fannie and freddie are doing. we are looking for opportunities wherever we can to try to align those standards. aligning, where appropriate,

makes great sense. >> as i understand it, another significant factor in terms of potential loss is the whole reverse mortgage program, which is projected to be a drain on the system, even in the best economic circumstances. as i understand it, fha has the authority to suspend that program. it is a huge profit center for folks to participate in the private sector. it is costing the taxpayer money, essentially, or threatening exposure in the best of times. why would we not extend that tomorrow? >> that is an option we are clearly looking at. we believe there is a better option, which would be to get legislative reform to allow us to implement a better product. that is something, as i talked

about with the senator, we would love to work with you on the -- in the next few weeks. we would love to be able to do something in this and session of congress. -- in this session of congress. >> please wrap it up. >> i think if you expand that program tomorrow, you will start saving the taxpayer money and create more pressure for the reform you are describing. >> senator? >> thank you. while i clearly have questions, let me create some balance from my perspective. first of all, am i wrong to say the report says fha continues to be impacted by losses

originated prior to 2009? >> that is exactly right. if you look at the chart to the right here, what you see is that, through 2007 and 2008, in particular, there are huge costs to the fund that 2000 -- 2009 we saw improvement. 2010 to 2012, those loans are expected to contribute substantially. >> a good part of what we have been suffering with took place prior to the administration. >> that is correct but i would give you all credit. at the end of 2008. >> there was some talk about higher loan limits. does not the audit also say the loans tend to perform better

compared to smaller loans? >> our early data is these larger lawns -- loans are performing better. we believe it is too early to make final conclusions about because the law -- these loans have not had enough time to season. >> it seems to me, they have probably strengthened fha's balance sheet. concluded there is a problem. the are part of the country in which those loan limits would make fha not as valuable to its core mission as it would in other parts of the country. that is why, on a bipartisan basis, we have passed preserving the higher loan limits. i am looking forward to seeing the puck -- to seeing the

continuing performance. i am waiting for the private sector coming in. it does not seem to be happening. there are some who would suggest it has not been performing well. maybe my eyesight is not good. i look at that second chart and it seems to me in the time she has become the acting head, the performance of the portfolio under her watch has gone from the negative performance that existed before her watch to a positive performance during her watch. is that fair? >> it is absolutely fair. i would add the chart just to the left of it also shows we have done that while reducing be market share. we have taken steps to bring private capital back. but still to have the performance improves substantially. >> do you have a different view that shows the fha's presence in

the market prevented housing from dropping another 25%? >> that is good and astro and analysis as we have seen. analysis thorough and analysi as we have seen. the country went through a crisis, either a regional crisis, whether there was lending available, or a national crisis. that was the role fha played with that increase in market share. we agree it is time to frank that share. but not to do it in so precipitous a way to raise premiums. >> i would say that in a time where the housing market is used to indicate is moving up word, it is still a very significant

challenge. you do no harm, especially in the midst of a recovery. i look forward to seeing how we move in this tool tract -- dual track. i want to turn to hurricane recovery. this hurricane, we are not used to hurricanes in the northeast. when you have a super storm that comes with a full moon, high tides, and a drawing in of what was the hurricane because of a front that came from the west, you have a perfect storm in all its innovations. i lived in new jersey my whole

life. i have never seen the type of devastation that exists in the state. the pictures some of my colleagues have shown the to not do justice. there are thousands of people who do not have a home to go back to. when people talk about the jersey shore, because of some of these shows, they think of a certain thing. these are people's homes. their lifetime homes, year-round communities, that do not have a home to go back to. i am talking about a 30 -- a $35 billion tourism industry that is devastated. i am talking about the mad the port of the east coast that suffered huge damages, national security, because we closed the only port that was a military

port and now we use the commercial port 1 we need to in the case of emergencies. i could go on and on. talk, told her, i want to get a sense from you as to the commitment of this administration and the federal government to help in new jersey, and certainly new york, and the region, recover. when we had hurricane katrina on the gulf coast in mississippi and alabama and louisiana, i was there. when we had tornadoes in missouri, i was there. when we had flooding along the mississippi, i was there. when we had cropped instructions in the midwest, i have been there. i believe this is the united

states of america. i fully expect that now, for the first time, we have the type of devastation others have suffered and should understand we are going to have the type of response others have received. i would like to get a sense of you as the type of commitment discount -- this at -- this administration has? >> this is a region i also have roots in. i married a jersey girl. i have worked in new jersey, grew up in new york. besides the personal commitment i have, i also see the president who is on the ground in new jersey almost immediately and has done everything he can to help the short term and has given the meat -- giving hen mee

response ability. you have my commitment we will do that. -- given me the reason has given me the responsibility. -- has given me the responsibility. you have my commitment we will do that. we will get the pass in the next few weeks because, frankly, there are too many homeowners, to many small businesses, too many renters that have lives that are simply on hold until they know what resources will be available to them. fema can not provide for a full recovery. they are a response organization. we need to take further steps through a supplemental this month to be able to move towards

a full recovery and give those families and businesses some hope that there is a future for them. >> let me close by saying, number one, we await what the supplemental looks like and we will reserve judgment until then. regardless of the size, we need flexibility in being able to seek the recovery we all want. in addition to a perfect storm, there is another perfect storm here. we get this storm in the midst of the beginning of winter. most of the hurricanes are in gulf seasons. totally different in terms of the consequences. fume -- huge in terms of the impact but still time to recover without the ravishing of the winter months. if we have a northeastern, our defenses are so down that it would be like a person's immune

system being susceptible to any type of illness. thirdly, we come with less than 30 days to the end of the congress. have to be done. i feel like i have to be houdini to accomplish this. we will do this. i look forward to your work and help. thank you for your indulgence. >> i would note that the senator will chair a subcommittee in new jersey next monday, december 10, on super storm standee pierre -- sandy. >> thank you for joining us. i would like to understand better an aspect of the review. the question that i have arises

from the interest-rate assumptions and the environment that is used to determine the prevailing view about the value of the mutual mortgage insurance fund. more 6 -- more specifically, you observe the fact that, the lower the interest-rate environment, -- he walked through the mechanisms by which lower interest rates, while good for the economy overall, tend to have an adverse affect on the fund. my understanding is the review contemplates a low interest-rate environment. in that environment, the value of the fund is -$31 billion. are we in a low-interest rate environment today?

maintaining current policy a least three years or so should that be the prevailing environment assumption? >> you make a very important point in terms of the fact that the review was done not today but at a point with economic projections in july, over the summer. it is accurate that interest rates have dropped further than were built into the primary, actuarial view. there are two factors to that. home prices have performed better than were used in the actuarial.

it would be significant lead better -- significantly better today just on that one variable. the second point is that the view is a point in time that assumes we do no further fha business. one of the things that is artificial about it is that, when interest rates go lower, it assumes piecer -- people pay off faster. that is accurate. what it does not take into account is half of those folks typically refinanced into a fha loan. by the nature of the actuarial, it takes a snapshot of time assuming you are closing down the fund. there are revenues that will come to the funds that are not built in. all that being said, we will, in the president's budget, include the lower interest rates you

describe. we will also include an updated projection of house prices. at that point, we will have a clearer picture of how this is offsetting -- how the offsetting factors play. we would not say the right number today is the $31 billion. >> do you believe the difference in home prices that prevailed today versus the time this was done and the difference in volume you're referred to -- you referred to would be enough to offset the value caused by the fact that we are a low interest- rate environment? >> we have not finished those calculations. we are in the midst of doing that for the budget. they are both large of fax. -- effects. we simply do not have an answer to that. >> it is a large effect that comes from the difference in interest rates. you know the low interest-rate

environment customs? >> let me ask my team behind me to get that. we will have that for you in a moment. >> my guess is i am not sure that assumption is as low as the rate is today with an interest- rate of 1.6%, it is shockingly low. we have a fed insisting it will keep this way. i will be interested to see what the net a fact of this interest rate is. -- effect of this interest rate is. >> there is an artificiality of the point in time because it presumes every one of the payoffs, we have no revenue to fha, where we know there is a large revenue -- >> there is a flaw in the model? >> no.

congress requires the review is done in a runoff scenario. we also looked at, what if we keep doing business, so we have those projections. that is not the 2% calculation. it is something we could give you more detail on of what the net effect would be. >> does the modelling assume any recession between now and 2017? >> the modelling does include a range of runs from a mild recession to a very severe recession. through the nature of the modelling, we do look at probabilities. >> but the evaluation, the model that comes up with the $13.5 billion.13.

? >> i am not sure if i am being clear. >> what is the average economic growth rate implicit or explicitness in that evaluation? >> again, i can get that for you momentarily. >> my last point, the senator from new jersey made a very important and impassioned argument about the effects of hurricanes and th sandy. we had damage in pennsylvania mostly from wind. the damage was not comparable to the damage by the water damage done along the shore. i am looking forward to seeing a supplemental that is well- crafted. we have a fiscal crisis of enormous magnitude. the necessary spending is very real to address the emergency.

it is important that the offset. >> thank you. i would like to thank the secretary for being here today. the financial stability of the fha is an issue the community does not take lightly. we will continue the dialogue and take action where necessary to protect taxpayers. we appreciate your testimony. this hearing is adjourned. >> thank you. host: --ll [captioning performed by national captioning institute] [captions copyright national

cable satellite corp. 2012] >> nice to meet you. >> explore the history of the capital city this weekend on c- span 2 and american history tv on c-span 3. up next, the senate debate on the debt ceiling. a joint economic committee hearing on the fiscal cliff. and shaun donovan discusses.

? morning, the national journal on the u.s. economy and a poll on the middle class. live coverage begins at 8:30 a.m. eastern on c-span 2. in the senate today, harry reid and mitch mcconnell went back and forth on fiscal cliff issues. there is part of their exchange. >> yesterday afternoon, i came to the floor and offered president obama's proposal on the fiscal cliff to show that neither he nor democrats in congress are acting in good faith in these negotiations. with just a few weeks ago

before a potentially entirely avoidable blow to the economy, the president proposed a plan the members of his own party will even vote for. he is not interested in a balanced agreement, not particularly interested in avoiding the fiscal cliff, and clearly not interested at all in cutting any spending. with the president is really in, as we learned just yesterday, is getting as much taxpayer money as he can, first by raising taxes on small businesses who he believes are making too much money, and then on everybody else. not so he can lower the debt or the deficit, but so he can spend to his heart's content. for months, the president has been saying that all he wanted to raise taxes on the top 2% so he can tackle the debt and the deficit. however, yesterday, he finally revealed that that is not really is true intent. by demanding the power to raise the debt limit whenever he wants, by as much as he wants,

he showed what he is really after is assuming unprecedented power to spend taxpayer dollars without any limit at all. this is not about getting a handle on deficits or debt or him. it is about spending even more than he already has. why else would you demand the power to raise the debt limit on his own? by the way, why on earth would we consider giving a president who has brought us four years of trillion dollar unchecked deficits of 30 to borrow? he is the last person who should have borrowing power. the only way we will cut spending around here is by using the debate over the debt limit to do it. now the president wants to remove that to cut all together. of course, it gets away -- it's in the wake of his spending plans. i assure you that will not happen. the american people want

washington to get spending under control and the debt limit is the best tool we have to make the president take that demand seriously. the american people want us to cut spending. it is a fight they deserve and a fight we are willing to have. i am prepared to ask consent to allow the senate to vote on the president's bill limit proposal. i would ask this either as an amendment to the russian pr member that we will vote on this afternoon or as a freestanding bill if that is preferred. therefore, i now ask consent that it be in order to vote on an amendment which is the president's debt extension

limit proposal. >> is there an objection? >> i have been thinking of how best to describe what has been having here in capitol hill for the last couple of weeks. every day, i get up and the first thing i read is the sports page. the sports page in "the washington post" is not as good as it used to be. there's always some good news and it is always on the sports page. due to the front page and get some of the bad news. but i -- but now i go to the front page and get some of the bad news. a team that is really fun to watch is the new york jets.

coach ryan has a problem. he has three quarterbacks, sanchez, tim tebow, and a guy by the name of mcelroy. he cannot decide who their quarterback is going to be. that is the same problem the republicans are having. romney is gone, but he still in the background. we have mcconnell and we have the honor. who is the quarterback, mr. president? -- we have mcconnell and we have boehner. who is the quarterback, mr. president? we just had an election. the people overwhelmingly know why we have this debt.

the polling right before the election showed that the vast majority of the american people realize that the debt was caused by george bush. that is a fact. mr. president, we have another judge report coming out tomorrow here we have a little problem because of what happened with hurricane sandy. but we will still have about 100,000 new jobs. we are approaching about 4 million jobs now that have been created. that does not merely make up for what was lost during the bush years, but we are making

progress. people in america realize we cannot have a top-down economy that the republicans so glove during the bush years and they wanted to create begin with governor romney. mr. president, i would be happy to take -- and they want to have again beginning with governor romney. mr. president, i would be happy to take a look at the proposal. if that is what they want to do, i would be happy to seriously take a look at that and report to the white house and my caucus. but until then, i object. >> mr. president -- >> that has been heard.

>> the majority leader says that the republicans do not know who the quarterback is which is common when you do not have the president. but on the democratic side, you know who the quarterback is and he is throwing interceptions. we're moving backward and backward and backward toward the goal line from $4 trillion annual deficits and my friend from nevada still wants to blame that on george bush? and now he is asking for an unlimited authority to borrow whenever he wants to or whatever amount he wants to? >> majority leader. >> as a said, we would be happy to look at the proposal by my friend. but the president does not want to do anything other than what we have done before. and that is where we are now and that is why i would be happy to take a look at his proposal. that is what we did last summer. i would be happy to take a look at that and move forward on this. we democrats have a long line of republicans, as i outlined earlier on, where people make sure that the middle class and the port are taking care of. we have the calmness from "the new york times," let's move on.

>> hours later, senator reid returned to the floor. >> i now ask unanimous consent that at 1:30 p.m. today, the senate did proceed to read s664, regarding the debt limit increase, that there be no limits [indiscernible] upon user yielding back at that time, the bill will -- >> is there an objection? >> i reserve the right to object. what we're talking about is a perpetual debt ceiling grant in effect to the president. matters like this always require 60 votes. i would ask my friend, the majority leader, if he would modify his consent agreement to

set the threshold at 60. >> majority leader? >> reserving a right to object. what we have here is republicans in the senate not taking is for an answer. this morning, the leader asked for consent on the proposal. now i am telling everyone to have that good, upper down vote. now he rejects his own idea. i guess we have a filibuster on the bill. so i object. >> is there an objection to the original request? >> yes, i reject. -- i object. >> whiplash. >> madame president. >> what just transpired deserves a word. senator mcconnell came to the

floor this morning and offered a change in law that would help us avoid the kind of obstruction and the kind of showdowns we have had in the past over the debt ceiling. in fact, the idea was not new. it was his original idea that has been the law of the land that followed. and he offered and challenged senator reid to bring this matter for consideration by the senate. he said he would bring this to a vote in 20 minutes. and we would decide up or down whether the debt ceiling problem would be resolved once and for all under senator mcconnell proposal. and then senator mcconnell objected, say, no, no, we need 60 votes. for those who do not follow the senate, 60 votes is equivalent to a filibuster vote. so this may be a moment in

senate history when a senator made a proposal, and when given a opportunity for a vote, he filibustered his own proposal. i think we have reached a new spot in the history of the senate we have never seen before. i will ask a parliamentarian to really look into this. i don't think this has ever happened before. but this calls into question if this was a kind of offer that would consider to be good faith. if senator reid offered to vote on it and senator mcconnell said no, that has to be a filibuster-proof revote >> i

would ask my colleague to yield for a question. is it also correct that, basically, if we had voted, we would guarantee that we would not place the country again in a situation of defaulting on our bills and send a message that we can work together? the fact that we were willing to accept the republican proposal and be willing to send a message that, as a senate, we want to make sure we have fiscal stability, that we're paying our bills, that this could be one step forward in making sure we can resolve the fiscal issues for the country. isn't that your view of this as well? in fact, it would be an important message about stability? i have to say i share your amazement that the leader would, in fact, object to his own proposal and now be filibustering his own proposal that we were willing to accept as a bipartisan good faith effort for the country. did he not really just take us in the wrong direction? >> the republican senate leader, senator mcconnell, has such a strong appetite for the filibuster that we have seen 386 or 387 filibusters in the past six years. now he has decided that another

good idea is to propose a bill and filibuster your own bill. i do believe that is history in the making. but that is why the epidemic for the filibuster in the senate has to change. what an abuse. we cannot have a vote on something that the republicans' proposed and the democrats were willing to vote for. this should make the news across america. it really is unfortunate. >> andy taylor covers congress for the associated press. what was he trying to do? >> i think he was trying to embarrass the democrats. he said the president's plan on the debt ceiling would allow the president to request whenever increases without the approval of congress.

i guess he wanted to embarrass the democrats if they wanted to vote for it in election years. >> had the democrats respond? >> there is a lot of politics going on here. we just talked about the politics for the mcconnell side. i think the democrats are aware that, even if they get the republicans to crumble on raising tax breaks for a cure -- for upper bracket people, there will be a need to increase the debt limit in march. that is what speaker boehner uses as his leverage to a year and a half ago in his talks

with president obama. i think there's a belief on the party democrats that they like to get this idea into come circulation. and they also want to manufacture some dialogue that the debt ceiling is not really the kind of leverage it was a year and a half ago. and you saw some of that from the president yesterday when -- or last week when he was talking about that he is not going to play that game may more. there is some of that. it turns out that the democrats would have enough votes to pass it through the senate. instead, senator mcconnell insisted that it requires 60 to get past the filibuster. >> on the republican side, how would a vote on either the fiscal cliff or raising the debt ceiling help the gop make their case? >> i am not entirely sure that it would. i am not sure hal and effective issue it would be pure >> the houses out now -- it would be. >> the house is out now. >> there is no public

indication. you talk with some senators who yesterday were saying that not a lot is going on, more privately them publicly. but since then, we know that president obama and steve [indiscernible] spoke yesterday evening. the fact that neither side is leaking what happened on that call, you might say that they are trying to get back on track. they know that if they leak each other's confrontations, that is not good. there are only two participating really in this negotiation. and if they choose not to leak out that information widely, it is a speculation. >> what is the handle and how quickly could be brought -- what is the end goal and how quickly could be brought up for

a vote? >> the goal is a down payment or some kind of thing for revenues, which is enough to get us past the fiscal cliff, turn off these automatic spending cuts and make sure that taxes don't go up. and then they would figure out what to do with the upper bracket. and then there would be a mechanism that would guarantee further action next year. if at all possible, they would disagree next year and there would be some sort of trigger or punishment for their lack of action. that sounds relatively simple, i think, putting it all together could take at least a couple of weeks after they have a deal. there could be some inevitable blocks either by conservatives

in the house or in the senate. -- inevitable blowups either by conservatives in the house or in the senate. the details can get pretty political party quickly. there's so much in flux. it all presupposes that the get an agreement. there was a school of thought that they could not get an agreement until tax rates actually go up next year. >> you can follow himat @apandrewtaylor.

thank you for the >> is part of the interview with sam goldfarb. host: we have been focusing on different parts of the fiscal cliff discussion. today we're looking at tax extenders for businesses and individuals. joining us is sam goldfarb, a tax writer for cq roll call. what our tax extenders? guest: they are temporary tax breaks. some people are concerned the entire tax code is turning into a big tax extender. they are considered to be a small provision and targeted at

specific types of businesses. host: why are they temporary? guest: a lot of people say they should be made permanent or they should be eliminated altogether. it is easier to pass when they are temporary. they keep on being extended and extended. host: we will look at some of these. these are some of the tax extenders and the cost of continuing the tax breaks through 2013. host: some of those are really specific.

guest: that is the idea. they have become a case study in what some people think is wrong with the tax code. if there are loopholes that can be claimed to love god and their because of a lobbyist lobbied hard to get there, it is these tax breaks that come under

scrutiny. host: why is the r&d tax credit not permanent? it is passed every year. guest: every year or every two. it actually expired this year and now they are talking about extending it retroactively for this year and for next year. how much sense does it make to extend it retroactively? the businesses have already done their research and developing spending and you're giving them a check for what they already did. it doesn't make a lot of sense. there are some of various not so great reasons. host: what are some of those reasons? guest: it makes it seems like a cost less.

something like $14 billion. it would be multiple times more if they were planning to extend it for 10 years. i would write, "the $1 trillion tax bill." they are lobbying every year. you can look it up. it is very transparent. host: the tax extenders we just looked at -- with the amt, would that be a tax extender but in a category by itself?

guest: i suppose so. the amt user goes in the tax extender bill and a bill was passed this year, the finance committee passed it, not the senate. it included the amt patch. host: if the tax extenders have to be dealt with by the end of the year, what are the options for congress right now on december 6 today? guest: these are kind of an afterthought at this point. often all these are extended for a year or two at a time.

they talk about making the list shorter. if they need to pass something, all have to pass everything for a year and it will not cost so much. they will get to this after they figure out the bigger question. host: they can do this in one bill? guest: it will go any big fiscal compromise. tax extenders or in the financial belau. they usually get snuck to the big bills. the senate finance committee passed a bill in august. the house has not formally acted. they send signals that they are ready to pass something similar

to what the finance committee passed. be they are more aggressive with the house republicans. host: what about the white house? guest: i think the white house has proposed extending them, basically a whole batch of them. when we do tax reform, we need to get rid of some of these. host: sam goldfarb is a tax writer with cq roll call. we have been talking about tax extenders. >> extended unemployment benefits for workers who have been jobless more than 26 weeks expire in january. it is part of the so-called

fiscal cliff. tomorrow morning we will look at the expiring unemployment benefits. or first guest is josh boak. "washington journal" is live every day on c-span at 7:00 a.m. eastern. >> the chiefs of staff had to make the plan for the invasion of japan without considering the atomic bomb. it was estimated that it would cost $750,000. 500,000 would be maimed for life. >> i choose to honor both the sacrifice of american servicemen

find their way through the pacific and a little girl who died as a result of an atomic bombing. it is unimaginable what that must of been like to be close to that center were that fireball originated. >> follow the journey to hiroshima sunday on american history tv. that is the 9:00 p.m. eastern. >> at a hearing on the so-called fiscal cliff, economists agree the problem has to be resolved immediately to avoid pushing the country into recession. they disagreed on how to raise the needed revenue. center bob casey chairs this joint economic committee hearing. it is an hour and 45 minutes.

>> the committee will come to order. we want to thank everyone for being here today. i did not have a chance to personally greet our witnesses, but i will have time to do that later. i want to thank both of our witnesses for being here. i will have an opening statement that i will make, and then i will turn it to dr. burgess. i know that vice chairman brady will be her as well. we know the challenges that we confront here in congress on a whole range of issues, which are sometimes broadly described under the umbrella of the terminology, fiscal cliff. when we confront those difficult challenges, we have to ask ourselves a couple of basic questions. one of the basic questions we must ask is, what will be the result and will be the impact

as it relates to middle income families? what will happen to them in the midst of all these tough issues we have to work out? we know there is broad agreement that going over the so-called fiscal cliff would jeopardize the economic recovery. it would do that by increasing taxes on families, halting employment growth, driving unemployment up instead of down, triggering a deep cuts to programs that families across the country count on. the job before the united states congress is to reach an agreement that builds on the economic progress that we are making, and puts us on a path to fiscal stability. we need to cut more spending, and generate more revenue. we need to do it in a smart way that keeps our economy growing. earlier this year, congress extended the payroll tax cut through 2012. the two percentage point

payroll tax cut has played an important role to sustain the recovery. boosting economic growth by an estimated 0.5% of one percentage point, and creating 400,000 jobs. we should continue the payroll tax cut through 2013, and yesterday i introduce legislation that would keep the employee payroll tax at 4.2% next year. to keep the economy growing -- there is good evidence of that in the last couple of months? job growth of about 511,000. to keep that momentum going, we should provide tax credits to small businesses. my legislation includes such an incentive for small businesses to grow. i am confident that congress will again be successful in

reaching a compromise in the days ahead. i look forward to hearing today from the experts that we have before us today on how to reduce the deficit while protecting middle income families. as we enter the holiday season, americans should not have to face the uncertainty that many will face with regard to their taxes. there is no reason that middle income families should go into this holiday season without knowing whether their taxes will go up next year. last year, democrats and republicans work together to cut nearly $1 trillion of spending. now we need to continue that bi-partisan work to cut more spending, and to bring in additional revenues. if congress fails to reach an agreement under the budget control act of 2011, $1.2 trillion in automatic spending cuts will take place between 2013 and 2021.

republicans and democrats agree that indiscriminate across-the- board cuts is not the right and to do at this time in our nation's history. if we trigger the automatic spending cuts and tax increases, gross margin bottom will fall by half a percentage point. we will reverse the hard-fought gains over the past few years. we cannot afford to go backwards. instead we need a balanced and bipartisan approach. one that balances the short and long-term needs, distinguishes between foreign investments and the core investments that must be reserved, and spending that we can live without that utilizes both spending cuts and

revenue increase. the first order of business should be to protect those middle income families i talked about and protecting them from a tax increase. the cbo estimates that simply extending the middle-class tax cuts would boost gdp by 1.3% and create 1.6 million jobs. let me say that again -- boosted gdp by 1.3% and create 1.6 million jobs from that tax cut we can enact. it would resolve much of economic safety for these middle-class families. the wealthiest among us can help us reduce the debt by paying more. it is encouraging to see republican members of the house and the senate speak out on the need or a deficit approach that includes raising taxes on wealthy individuals and to moving right away to ensure that 98% of families do not face a tax increase. we need to look at history.

what we saw in the 1990s and 2000s, there was no relationship between lower marginal tax rates for the wealthiest among us an economic growth. first during the clinton administration, the top marginal tax rate was raised on the wealthiest individuals and the economy grew at its fastest rate in a generation. it added more than 22 million jobs. during the following eight years, the top marginal rate dax tax rate was lower, but economy never regained its strength from the reviews decade. middle-class families are vulnerable when the recession began at the end of 2007. i hope this hearing is helpful

not just in this hearing, but across this country to people who are watching and waiting for congress to act. i will say more at the end about some of our members who are leaving. it has been an honor for me to serve as chairman of this committee and also served with my friend, kevin brady, as vice chair. he has been great to work with. bipartisane'll be success in congress. i look forward to working with him as i change seats in the senate for the next congress. i am grateful to our witnesses, whom i will introduce. before i do that, opening statements. >> i think the chairman for the recognition. this is the concluding hearing from the 112th congress. i'm behalf of the vice chair, kevin brady, on behalf of

republican members and myself, we wish to thank you or your services on the committee. this unique committee with equally divided. people are used to seeing such division producing gridlock in washington, but senator casey and senator brady worked together and had bipartisan cooperation. joint economic committee has riced as a widely respected forum on debating issues. i think you, senator casey, for your leadership. i also want to recognize the retiring senator from this committee, the senator from new mexico and the senator from virginia.

our first secretary of the treasury, alexander hamilton, observe energy is a leading character in good government. the president must lead in a divided government and must not advocate his or her responsibility. president obama has the responsibility to propose a real bipartisan plan to avert the fiscal cliff that can pass both the house and the senate. withdrawing from the recommendations of the simpson- bowles commission, the president could propose a plan that would not only avert the so-called fiscal cliff, but also help us avert the fiscal abyss. if president obama were to offer such a plan, republicans would act favorably. going over the cliff is unnecessary.

as it has been observed in "the wall street journal," the president is boxing in the republicans. he is offering them a deal they cannot accept. first, the president has repeatedly called for a balanced solution involving both revenue and less spending. what is obvious to the most casual observer is that this plan is not a balanced. the fiscal cliff involves nearly four dollars of anticipated revenue from higher taxes for every dollar of spending cuts, yet the president wants more revenue and fewer spending cuts. if we fell off the cliff, his plan calls for another round of stimulus spending. you have got to be kidding me. what the president's plan lacks is any reform in our entitlement system. the unrestrained growth in

entitlement system is driving deficits and driving the debt even higher than the percentage of our gdp. it is estimated to be as high as $128 trillion. even if they confiscate all of the income that excesses $1 million, we cannot pay for the entitlement commitments that the federal government has made. we have made promises to ourselves that we simply cannot keep. without some sensible entitlement reform, our credit rating will be downgraded again. we will become a country that none of us recognize. secondly, fiscal plans failed to achieve their government budget deficit or debt reduction goals. dr. hassett has examined fiscal plans in other countries. on average, unsuccessful plans

proposed an increase in revenue and spending cuts. moreover, the higher revenues in successful plans were generally drawn from non-tax sources and avid sales and adjusted fees for government services. thirdly, the government argues that the 2001 tax cuts are extended, raising tax rates on the top 2% will not harm the economy because it will not affect consumption expenditures. however, analysts have analyzed the combination of expectation of the 2001 tax reduction for the top 2% and the extension of the medicare act and capital income. under the president's preferred tax policy, the top rate would go from 35% to 49.9% and for

ordinary income from 15% to 25%. the long-term consequences of president obama's tax policies would have a profound and negative affect. capital stock would fall. fewer jobs and lower wages resulting in higher taxes would harm the middle class. data reveals three important facts of high income earners. the taxes on the wealthy raise as much faster than on everyone else during economic booms, but they also fall much faster during economic bust. people report more income when tax rates are low and not when they are high.

there are better ways to increase federal revenues than hiking tax rates. congress could enact a program of tax reform that would lower rates and eliminate interest reductions. the president could open up more federal lands and offshore areas for energy exploration. his administration could take a more balanced approach to new regulations. economic growth can help solve our fiscal problems if the economy had grown at the percentage as it has done in the past.

the treasury could have collected an additional 650 billion dollars in fiscal year 2012. the deficit that would have fallen. still bad, but remarkably better than where we find ourselves today. republicans stand ready to work with president obama for a balanced and bipartisan solution. so far, no evidence of that. let's create a long-term solution that does not burden individuals and gives businesses optimism to go forward and invest in the american economy. then the economy can grow for all citizens. i look forward to the testimony of our witnesses. >> thank you. i will introduce our two witnesses. dr. zandi is the chief economist at moody's analytics. he looks at macro racquets and public policy. he is the influential source of policymakers and businesses and journalists.

recently he published a report assessing the challenges of approaching the fiscal cliff and the most effective way to achieve long-term, fiscal stability. he received his phd from the university of pennsylvania. that will be a recurring theme in these introductions. [laughter] dr. zandi, thank you for being here. dr. hassett is the director and senior fellow at the american enterprise institute. he holds a phd from the university of pennsylvania. his research includes the u.s. economy, tax policy, and the stock market. he is previously a senior economist at the board of governors at the federal reserve system. he went to that graduate school of business at columbia university. he has worked for both the george w. bush and clinton

administrations. both of you went to the same university. i'm sure you can agree on everything today. dr. zandi first. >> thank you for the opportunity. it is an honor to be here with kevin, a good friend of mine. let me say that these are my own personal views. lawmakers have to resolve three issues -- first, the fiscal cliff. second, raising the treasury debt ceiling, which as you know is becoming an issue rarely

soon. third, achieving long-term fiscal sustainability. that is deficit reduction and tax increases and spending cuts that allow the gdp ratio to stabilize by the end of the decade. these three things need to be done now. in terms of the fiscal cliff, if policy is unchanged and we go over the cliff and there is still no change after that, the gdp in 2013 will 3.5 percentage points. subtract that and that is a severe recession. cbo and others are probably us are underestimating how severe that will be because confidence is very weak. it is unclear how the reserve would response to this. we need to scale back from the cliff. at the very minimum, the cliff needs to be scaled back so it is only a hit to gdp at 1.5

percentage points at most. if you have more of a drive than that, it it becomes it. the economy will weaken. the budget deduction will deteriorate. we are seeing a fiscal drag in europe. i would argue that we should smooth into this drag even more. make policy changes so next year the gdp is half of this speed limit. that would be consistent with extending an emergency program and some form of tax holiday. in terms of the debt ceiling, that needs to be increased. it would be nice to extend it at the next presidential election. it would be nicer to get rid of it altogether. it is anachronistic law that is a problem.

it creates a great deal of uncertainty. as you can see, it can do a lot of damage to the economy. there are a lot of reasons why it is being considered to eliminate that ceiling. it should be carefully considered. at the very minimum, we should push this to the other side of the election. we do not want to address the debt ceiling on a regular basis. it is damaging confidence. on fiscal sustainability, we need deficit reduction in the next 10 years of about $3 trillion. to get there, a balanced approach would be $1.4 trillion in tax revenue. half of that would come through tax reform and the other half through higher tax rates. $1.2 trillion in cuts to

programs -- medicare and medicaid, social security, and other budget items -- that would leave you with approximately $400 billion in interest savings. at all of that together and you get $3 trillion. the spending cuts were implemented as part of the budget control act. if you add all of it up, if you go down the path i articulated, the spending cuts would be -- the revenue increases would be 2-1. i think it is very consistent in the spirit of simpson-bowles. it would be a good goal to achieve. it is doable from both an economic and a political perspective. finally, you need to nail this down.

uncertainty is killing us. it is hurting business investments. it has not affected laying off decisions yet, but it will. if we do not nail this down, investors will bail and the economy will struggle. but if you address this problem reasonably -- we have made a lot of progress since the great recession. if we nail this down, we will be off and running. thank you. >> dr. zandi, thank you. dr. hassett. >> thank you. it is always a pleasure to appear before this committee. under your leadership, this has always been a collegial lace to testify. it is an honor to be here. my testimony is broken up into

two parts. in the first part i described the short-term consequences of going off the fiscal cliff. in that section, i concur with dr. zandi that if we were to go off the fiscal cliff with no policy changes, then the near- term negative economic consequences would be significant. it would throw us into a recession. in the second part of my testimony, i will discuss the trade-offs we face between putting off the tough problems for tomorrow because we are worried about near-term effects. i think the evidence of the long-term effects of government debt to gdp ratio is quite overwhelming. it began with an early analysis who analyze economic growth that high debt levels.

it has been confirmed that high levels of government debt shows low economic growth. these literatures can get more sophisticated. there is a paper that identifies a tipping point in gross debt to gdp ratio. if it gets above 73% and we are above that now, that has a very significant and negative affect on economic growth. to put the result in perspective, there is a simple tabulation that provides intuition for the result. if you run a deficit of 6% in gdp for the next 10 years, that would add to the gdp ratio. that increase would be a not by the end of the decade that would reduce the forecast. these effects are very

significant. that growth story might be alarming, but the picture looks worse if you think of financial calamity. much of europe this year has been in turmoil because of the greek crisis. look at the struggles and other countries and take consolation in our relative stability. a recent study examined long- term projections for other countries debt burden. it found that the u.s. has a bigger adjustment than any of the european unions. it gives an urgency for us to act.

it is also possible to theorize about how a continuation of these policies could hurt growth farther into the future. a recent paper shows that if we do not act on this, and we are basically producing a fundamentally different america. it suggests that we are going to move into a world by 2040 were economic growth in the u.s. is not what we normally expect to see each year. there is crowding out of unity by the government. that is how urgent it is. what should we do? there is another large literature that looks at fiscal consolidations. using my own study as an example and along with my two

colleagues, our metric of success is that they achieve deficit reduction. we found fiscal consolidations that were very heavily weighted for spending were much more likely to be except the both then consolidations that were heavily weighted toward tax increases. we speculate that this is because we find this result because the tax heavy fiscal consolidations do not make tough choices on entitlements and because spending is more real when you lift the tax rates. it is easy to discuss reforms that could but u.s. and a positive trajectory. dr. zandi and i agree on the rough outline of what that would look like.

the political challenge is a heavy one. if you look forward to the america we are creating, that we all have to agree that the stakes could not be higher. thank you, mr. chairman. >> thank you, dr. hassett. i would like to start with a comment about something we are probably not talking enough about. even as we are wrestling with trying to debt a handle on the fiscal cliff, we cannot lose sight of their urgent priority of making sure we have job growth -- job creation, to say the least. many of the components you have outlined -- that both of you have -- it comprised of the broad description of the fiscal cliff whether it is the expiring tax cut provisions, the expiring tax cut extensions, and spending cuts as well. if you consider more, which of those would you consider having

the biggest bang for the buck in terms of economic impact of those that we are discussing here today? >> it is a given that we will extend the current tax rates for taxpayers that make less than $250,000 on an annual basis. that is absolutely necessary. when you consider the other things that are happening -- in terms of the bang for the buck, the emergency unemployment insurance program is very effective. it is small in the grand scheme of things. cbo is estimating it would costs per calendar year about $33 million. but the economic opportunity for job growth compared to the

unemployment rate would be measurably more than that. we are down to go to million people in the program. it is falling each year. i expected to fall even more than that in the next year. there are also limits to how much emergency you can collect. there has been some good work that has come out of the reserve. it is a very significant positive. i think the payroll tax holiday has been very affective. it has very high bang for your

buck. it gets spent. it is designed in a way that helps lower income households. you might want to consider scaling that back. you can go to go 1%. remember making work pay? that was a good middle ground. it is probably more affect it in the sense that it is designed to help more middle and low income households. that is a very effective program. >> dr. hassett, any comments on this question? >> thank you for asking that question. i disagree with my distinguished friend on this topic.

keynes himself talked about the kind of place where we are right now. if you get onto a cycle of dependence on measures, it could lead to a downward spiral as the national get -- that gets bigger because you try to stimulate things with shots -- one-time shots. i speculate that you might incur that the best possible thing we can do right now for unemployed americans is fix our big problems. it would help if american businesses had clarity on what the future would look like. the sight of relief rally from such a thing would be worth better than anything you could get. >> i appreciated. i'm out of time, but i will come back to these issues in a moment.

>> dr. hassett, an interesting opposition since you cannot ask questions. let me pose a question to you -- if the best thing that can be done is a long-term fix for our problems -- get out of this cycle that we are in -- would you agree with dr. hassett on that? >> i agree that we do not want to get into a cycle of dependency. we need to phase out the support -- the temporary support we have been running through the economy. in fact, that is what we have been doing. go back to 2009. by 2011, the fiscal policy was neutral in respect to the economy. this year it will subtract from

growth 8/10 of 1%. we have gone from fiscal stimulus to fiscal drag. we need to smooth into the fiscal drag. the government will be -- debating how much of a headwind it will be. we need to smooth into that drag. in the long run, we will be better off for it. >> is that a committee rule? >> it's not a rule. we will just keep it to a minimum. >> let me ask you for your response to his comment on the cycle of dependency. >> i think it is quite possible that is where we are.

>> can i interject here? it feels that way to me. it feels like we are in a cycle of dependency. we are dealing with the 2011 debt limit and the stimulus from 2009. it is the same thing with different labels. i am having difficulty seeing a way out of this cycle, but i interested in your observations. >> the way that i think about this -- at moody's they have been careful to put in this perspective into their analysis. think about the way of what happens when you change the way you are playing the game.

if you decide to spend a lot this year or mail checks to folks this year, that has a multiplier effect. you might get 2% gdp growth this year. but if you take that away, you are starting out with gdp growth 2% lower. the problem is that the keynesian policy really needs to look at all three acts. so you go up and you go down. the effects are equal and opposite. there is a third phase where you need to pay for it. it is in the negative. in the end, you will have to pay something. you see that in the long run cbo analysis of these policies. we are in the hangover phase. i can say that there is a way out and it is very promising. we need to recognize that we are out of the emergency period. if we can fix the problems, we can get out of the hangover.

>> the president is proposing the 47% spending cuts and 57% spending increase. why in the world would be even consider the president posted plan under the scenario that you described? >> the argument against our paper being a guide is that there are many small countries that may be have to be more aggressive about spending because people who lend them the money might head for the exit quicker. if you want to base our consolidation on the things that have succeeded in the past, we would be at a certain percentage of spending. there is great comfort that it would be successful. there is argument that we might be able to handle having bigger

revenue share of that. if we copy the successful ones, we should surely almost succeed. if we have a half-and-half approach -- look at our paper when it came out almost two years ago. we said that the uk consolidation would fail. it had too much revenue. as we are seeing now, millionaires and billionaires are heading for the exit. that is what we are going to see. >> thank you. mr. chairman, i yield back. >> i would like to congratulate the chairman on his election and the fine work he has done as chairman of this committee and to congratulate mr. brady on being selected as his chair of this committee and the next congress. for our distinguished witnesses, they agreed that what we need to do is have a long-

term solution. i would like to ask dr. zandi how we achieve that. we are several million dollars apart from the president's proposal. how would you close that gap? outline the president's proposal and speaker boehner's proposal. how can we get people employed and move our economy forward? >> i apologize. there will be a fair amount of numbers here. the president's tax revenue proposal amounts to about $1.6 trillion over a 10-year period. that is from higher tax rates.

roughly 600 billion are from some kind of tax reform. they are all reasonably good proposals. speaker boehner's proposal on revenue -- is roughly $800 billion in tax reform. we are about $800 billion apart on taxes. my view is that we should roughly split the difference. i would suggest $1.4 trillion in tax revenue. $700 billion would come through tax reform. we can discuss what that might look like. $700 billion would come from higher tax rates. the president would scale back one trillion dollars. we can talk about that.

on the spending side -- does 600,000 -- speaker boehner has come forward with some proposals. i'm not quite clear on how much the spending cuts he has proposed. the president's proposal is short. to get to where we need to go, that $3 trillion target and fiscal stability, we need $1.2 trillion in spending cuts.

that should be part of the process. we should do some things to reform social security. after the end of the day, it needs to be almost double of what he is proposing. if you sit down and do the arithmetic of spending cuts and look at medicare and medicaid, unless you're proposing a big and structural change in the program, which i do not think is on the table at the moment, it is difficult to get that cut. it is really tough. if you do a run rate of about $600 billion in cuts, that is ok. bottom line -- fiscal sustainability at the end of this 10-year horizon.

if we do that, we are off and running here. >> my time is about to expire. dr. hassett, i would like to hear your analysis on how far apart we are and how we can close that gap. >> thank you. we have a tremendous opportunity to make sure that we hand off a thriving economy to our kids. i mentioned that it we were to run $600 billion deficit for the next 10 years, by the end of that, the debt -- it would lower our gdp forecasts. if we were to cut with the fiscal consolidations that $600 billion deficit to $300 billion, we would be buying future generations gdp growth in the long run. it is ultimately a question of

what kind of world we want to live in 10 years from now. if you want to look like the way europe has been growing, we will have a small consolidation, such as the small consolidation proposed by the president. if you want to have the kind of growth that i hope we can have with a bigger consolidation, that one is being proposed by speaker boehner. >> thank you. >> i would like to focus on something that is probably more of interest to the economists and ordinary people. let's talk about ratios. what i heard you lay out, dr. zandi, was more of an ideal situation.

they get you at roughly at $3 trillion. the negotiations over last year's debt ceiling -- the new number would really be 1-1. that is not actually my question. i want to get to now. we have looked at the president's offer. we haven't found any spending reductions at all. we found the $1.6 trillion tax increases. we saw the extension of the unemployment insurance, which is an increase in spending.

the delay in the spending cuts and no reform in entitlement whatsoever. do you think the president's current offer gives us the 2-1 test? >> no. he needs to come up with roughly $600 billion more in spending cuts over the next 10 years. i think that there are significant reforms in medicare, medicaid, agricultural subsidies, and other programs in the budget. those are difficult things to

implement. it takes a lot of guts to propose those things. i would not discount them. they are important. to answer your question more specifically, we do name or spending cuts to get to my ideal. >> policymakers need to reform entitlements. i do see members of the other party -- most notably, mr. hoyer --he said, not now. they are on the table for a later discussion. i have been disappointed that a lot of the discussion seems to be on the revenue side and not really on the cutting side. really quickly, the debt ceiling. there is something about your

testimony that caught my attention, which is your support for the initiative offered by senator rob portman. lawmakers can adopt a version of the so-called dollar rule to address the 2011 debt ceiling. policymakers could agree at the beginning to cover that here -- year's budget. they could -- adopting some form of this rule would be a good safeguard. i appreciate his comments. isn't this exactly what we did that now everyone is trying to get out of? we have a dollar of spending reductions. 1.2 is already in place. the other is in the sequester. isn't that what we did? if that isn't a good idea, why are you and the the others now suggesting it is not a good idea?

>> let me say a few things. first, the broad context. we need to get rid of the debt ceiling law. it is agonistic. we need to get rid of it. i suggest that some version of the dollar for dollar rule should be incremented. at least considered. it does not need to be one-for- one. it could be 50%. that is not going forward. my view is that we need to nail down how we can get to fiscal sustainability. sustainability.